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THE BUDGET AND ECONOMIC

OUTLOOK: FISCAL YEARS 2005–2014

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, JANUARY 27, 2004

Serial No. 108–15

Printed for the use of the Committee on the Budget

(

Available on the Internet: http://www.access.gpo.gov/congress/house/house04.html 

(II)

COMMITTEE ON THE BUDGET 

JIM NUSSLE, Iowa, Chairman 

CHRISTOPHER SHAYS, Connecticut, 

Vice Chairman 

GIL GUTKNECHT, Minnesota 

MAC THORNBERRY, Texas 

JIM RYUN, Kansas 

PAT TOOMEY, Pennsylvania 

DOC HASTINGS, Washington 

ROB PORTMAN, Ohio 

EDWARD SCHROCK, Virginia 

HENRY E. BROWN, JR., South Carolina 

ANDER CRENSHAW, Florida 

ADAM PUTNAM, Florida 

ROGER WICKER, Mississippi 

KENNY HULSHOF, Missouri 

THOMAS G. TANCREDO, Colorado 

DAVID VITTER, Louisiana 

JO BONNER, Alabama 

TRENT FRANKS, Arizona 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

THADDEUS MCCOTTER, Michigan 

MARIO DIAZ–BALART, Florida 

JEB HENSARLING, Texas 

GINNY BROWN–WAITE, Florida 

JOHN M. SPRATT, JR., South Carolina, 

Ranking Minority Member 

JAMES P. MORAN, Virginia 

DARLENE HOOLEY, Oregon 

TAMMY BALDWIN, Wisconsin 

DENNIS MOORE, Kansas 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

ROSA DELAURO, Connecticut 

CHET EDWARDS, Texas 

ROBERT C. SCOTT, Virginia 

HAROLD FORD, Tennessee 

LOIS CAPPS, California 

MIKE THOMPSON, California 

BRIAN BAIRD, Washington 

JIM COOPER, Tennessee 

RAHM EMANUEL, Illinois 

ARTUR DAVIS, Alabama 

DENISE MAJETTE, Georgia 

RON KIND, Wisconsin 

PROFESSIONAL STAFF

RICH MEADE, Chief of Staff 

THOMAS S. KAHN, Minority Staff Director and Chief Counsel 

(III)

C O N T E N T S

Page 

Hearing held in Washington, DC, January 27, 2004 ............................................ 1

Statement of: 

Douglas Holtz-Eakin, Director, Congressional Budget Office ....................... 5

Prepared statement and additional submissions of: 

Hon. Mario Diaz-Balart, a Representative in Congress from the State 

of Florida ....................................................................................................... 4

Mr. Holtz-Eakin ................................................................................................ 11

Letter in response to Mr. Neal’s question regarding AMT ........................... 22

(1)

THE BUDGET AND ECONOMIC OUTLOOK: 

FISCAL YEARS 2005–2014

TUESDAY, JANUARY 27, 2004

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to call, at 2:09 p.m., in room 210, 

Cannon House Office Building, Hon. Jim Nussle (chairman of the 

committee) presiding. 

Members present: Representatives Nussle, Shays, Portman, 

Schrock, Brown, Wicker, Hulshof, Tancredo, Vitter, Bonner, Garrett, Diaz-Balart, Brown-Waite, Spratt, Moran, Moore, Neal, 

DeLauro, Edwards, Scott, Thompson, Baird, and Emanuel. 

Chairman NUSSLE. Good afternoon, the Budget Committee will 

come to order. Welcome everybody on the committee back for a new 

year and for a new budget season. We have invited the CBO Director Doug Holtz-Eakin here today to ensure that we have a clear understanding of our Nation’s fiscal picture. We are here today to ensure that we have a very clear picture and understanding of our 

Nation’s fiscal situation. It is critical for us to understand just what 

the bottom line is, so to speak, and so we have invited the Congressional Budget Office Director Doug Holtz-Eakin to provide us with 

that. 

The resource that we use as a starting point is the report that 

was released just yesterday from the Congressional Budget Office, 

which gives their estimations of the budget and economic outlook 

for the coming decade. 

Director Holtz-Eakin is here not only to discuss with us the hard 

and fast numbers of this report but to explain just what all these 

numbers mean and to put them into some context; in other words, 

how did CBO arrive at these estimates and what are some of the 

key variables that could affect our economic and budgetary future. 

And again to be clear, the purpose of today’s hearing is not to 

guess what will be in the President’s budget or to even for that 

matter begin writing our budget, but to get a solid understanding 

of where we are right now so that we can have a better idea of 

where we should go from here. 

Next Monday the President will introduce his budget and we will 

begin a series of hearings, at which time it will be appropriate to 

discuss what should or for that matter what should not be in next 

year’s fiscal budget. 

That said, let’s get this process started by taking a look at what 

we have got. First, this report tells us in one very important respect that we are in a pretty similar situation or position as we 

2

were back in August when we received these projections. We have 

large deficits in the near term, $477 billion in fiscal year 2004, and 

then $362 billion in fiscal year 2005, with deficits declining over 

the next decade according to this estimation. 

This is really not a surprise. We have these deficits because we 

intentionally spent—and I say intentionally spent—at an extraordinary pace to react to extraordinary circumstances ranging from 

terrorist attacks and conflicts in Iraq and Afghanistan to an economic recession. 

Now, does that mean these deficits are unimportant? Of course 

not. I have said that the spending driven deficits are an issue that 

we do need a get a handle on, we are going to get a handle on this 

information today because we are going to have a lot of serious discussion and have to make a whole lot of tough choices in the next 

few weeks to try and figure out where we need to go from here. 

Before I turn this over to Director Holtz-Eakin for his explanation of the report, I would like to stress a couple of key points 

that I noticed in looking through the report. First, last year at this 

time we made it clear that we needed to invest in our economy to 

get it growing again. Those investments have clearly paid off. From 

GDP growth to retail sales we are seeing record highs; and most 

important, the economy has begun to create jobs again. Not as 

quickly as we would like, but it is moving in the right direction and 

faster than just about anybody predicted a year ago today. 

In fact, to quote the report, ‘‘The economy should continue to 

grow at a healthy rate over the next 2 years for a recovery appears 

to have taken hold.’’ There should be no question that the economy 

has begun to recover and that the tax cuts that we installed are 

working. 

That said, I believe our starting point for the budget is really different in two cases. First, CBO’s baseline assumes that Congress 

will raise taxes or that in fact the tax cuts will not be made permanent. This assumes that expiration of a whole range of tax relief 

provisions, including increasing the marriage penalty, reducing the 

child tax credit, resurrecting the death tax, increasing taxes on 

capital gains and stock dividends and increasing taxes on small 

businesses, for that matter increasing taxes on every American 

who pays income taxes, will occur. 

That is not an assumption that anyone should make as we move 

forward. This will not happen as far as I am concerned in this 

budget or under our watch. In fact, I would be willing to wager 

that we might even have a few Democrats who might be willing to 

support it in that regard. So I think you can safely rule out that 

part of the assumption. 

Second, the baseline assumes that the $87 billion of the Iraq supplemental that we spent last year will continue to be spent every 

year for the next decade. I think that also we can presume, barring 

extraordinary emergencies, that that will not also be the case. 

So with that context and that understanding, we need to turn to 

the report and to get the wisdom of the Director of the Congressional Budget Office. Before we do that, let me turn it over to Mr. 

Spratt for any comments that he would like to make. 

Mr. SPRATT. Thank you, Mr. Chairman. Dr. Holtz-Eakin, we welcome you back. As always, you have done an excellent job as the 

3

Director of the Congressional Budget Office, and we welcome you 

today even though you are not exactly the bearer of good tidings. 

You have got some very sobering news for us about the budget. 

Your projections show that deficits loom far into the future, that 

we are not going to grow out of them and somehow glide effortlessly to the conclusion we all want, which is a balanced budget, 

and frankly I think they cast grave doubts on the Bush administration’s claim that it will be able to cut the deficit in half over the 

next 5 years. 

In particular, the first chart that I would like to call up here 

gives you a summary of the deficit for this year and the decline in 

that deficit over 3 short years. January 2001, CBO projected we 

would have a unified surplus of $397 billion. Instead, we have a 

unified deficit this year of $477 billion. 

Next chart. This shows the cumulative surplus or deficit over the period of 10 years, a deterioration from $5.6 trillion to 10-year estimated surplus between 2002 and 2011 and a cumulative deficit as 

CBO now sees it. That is a swing of about $8.5 trillion in the wrong 

direction. 

Next chart. And tax cuts add to the problem. We are not here 

to advocate the nonrenewal of the child tax credit or the expansion 

of the 10 percent bracket or the 15 percent bracket, but we are 

here to call attention to the fact that the whole agenda of the Bush 

administration is tax cuts if they are extended aggravate the bottom line significantly. They increased the January 2004 baseline. 

With the expansion of the tax credits, the cuts come out to $4.150 

trillion. 

Next chart. This is the only budget surplus, excluding Social Security, which I think we should do and which Congress has dictated we should do in putting Social Security off budget. Back out 

Social Security, and you will see the debt accumulation between 

2005–14. If you do the tax cuts, if you renew them all, we will be 

$7.177 trillion. That is what we will add to our national debt over 

that period of time. 

Next chart. Now, the Bush administration is apt to say in the 

face of forecasts like these this is why we need pro-growth policies. 

We couldn’t agree more. We would love to grow out of it, but the 

truth of the matter is that CBO is assuming pretty robust growth, 

4.8 percent for 2004, 4.2 percent for 2005, tapering off to 3 percent 

and then dropping slightly below 3 percent, but substantial robust 

growth for the next 10 years and particularly in the near term. 

Next chart. If you look at pages 92 and 93, that is the only place 

where the small print is big enough to read, you will see that if 

you do extend the tax cuts, you will add $2.3 trillion to the deficit 

over 2005, between 2005–14, that 10-year period of time. 

All that is going to the bottom line. In 2001 when it appeared 

that we had a surplus of $5.6 trillion, some may have felt that a 

tax cut of $1.350 trillion was defensible, but now we know we don’t 

have a surplus. We have a deficit, and the renewal of these tax 

cuts when they expire will add $2.3 trillion to that deficit. There 

is no way around it. 

Next chart. Now, it is also said by the Bush administration frequently we have got to rein in spending, and in that regard they 

mean discretionary spending, which is in the 13 different approVerDate 0ct 09 2002 16:23 Mar 29, 2004 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 X:\HEARINGS\108TH\108-15\HBU027.000 RYAN PsN: RYAN
4

priation bills that we pass every year. But if you look where the 

increases in spending over and above current services have come 

over the last four fiscal years, you will see that the lion’s share of 

it, 90–95 percent, has gone to defense, homeland security and our 

response to 9/11 for New York City and for the airlines relief. Ninety to 95 percent of it has gone there. 

I would like to think we could rein in some of that, but I don’t 

think we can. In truth, I think you will probably see when the 

budget comes up an increase in homeland security because there 

is a fairly common feeling that we are standing on thin ice and 

barely funding that at an adequate level. 

Next chart. So a couple quotations there that ended up. We have 

got a serious problem on our hands. I don’t know whether we will 

get down to brass tacks in dealing with it this year or not but sooner or later we will have to deal with it. 

One particular statement you made in the report today—a couple 

of them struck me, Dr. Holtz-Eakin. First of all, you noted that if 

we allowed the tax cuts to expire as scheduled and held discretionary spending to the rate of inflation, then the budget would 

balance itself over this period of time of 10 years. That is the way 

I read your report. 

On the other hand, you said if you renew all of the tax cuts that 

in 2014 we will have a deficit of $484 billion. There on the eve of 

the retirement in big numbers of the baby boomers we will still 

have a huge deficit which will aggravate the problem of supporting 

the retirement programs that the baby boomers are looking forward to. That is the gravity of the situation we find ourselves into, 

and there is no way out of it except a budget plan that comes to 

grips with the different elements of it. It has got to include taxes, 

it has got to include spending, it has got to include all of these elements because this is a big intractable problem, it is not going 

away, and we can’t grow out of it. 

We will look forward to your testimony. 

Chairman NUSSLE. Director Holtz-Eakin, thank you for coming 

back to the committee and for your work. Your entire report will 

be made a part of our record here today, and you may proceed as 

you wish to give us the details of the report. In addition, all members will have 7 days to enter statements for the record. 

[The information referred to follows:]

PREPARED STATEMENT OF HON. MARIO DIAZ-BALART, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF FLORIDA

Thank you, Mr. Chairman. Today’s hearing marks the first in a series of hearings 

leading up to the debate over the fiscal year 2005 budget. It is important to not only 

review the current economic state, but also evaluate the projections for the next 10 

years. 

Over the last 4 years, the U.S. economy has experienced significant hardship due 

to the 9/11 terrorist attacks, corporate accounting scandals and the wars in Iraq and 

Afghanistan. These events have greatly contributed to the sharp increase in spending and, ultimately, the current deficit levels. 

Fortunately, the third quarter highlighted a strong recovery in the economy attributed to the growth from the tax relief passed last year and the return of investor 

confidence. It is now our responsibility to create policies that will not only extend 

this growth, but foster greater growth in the future. 

It is clear that the major source of recent growth has been the tax relief passed 

by Congress and signed into law by the President last year. In fact, estimates show 

that the combined tax relief between 2001–04 amounts to nearly $600 billion (or 

5

about 6 percent of gross domestic product). Additionally, 2.1 million more Americans 

would be out of jobs without the tax cuts and the unemployment rate would be 

around 7.5 percent rather than the current 5.7 percent. 

As we enter a period of growth, I strongly believe that our economic path should 

be focused on adhering to the concept of fiscal discipline. We must—in every way 

possible—help Congress restrain spending and work on eliminating wasteful spending that is hamstringing the Federal Government and greatly burdening the American taxpayer. 

I look forward to working with my colleagues on the Budget Committee to ensure 

that the fiscal year 2005 budget not only represents a restraint on spending, but 

also a clear path to economic recovery. 

Thank you.

STATEMENT OF THE HON. DOUGLAS HOLTZ-EAKIN, 

DIRECTOR, CONGRESSIONAL BUDGET OFFICE 

Mr. HOLTZ-EAKIN. Thank you, Mr. Chairman, thank you, Congressman Spratt, members of the committee. I appreciate the 

chance to be here today to talk about the CBO provisions for the 

budgetary and fiscal and economic outlook for fiscal years 2005–14. 

We have submitted our entire report for the record. There is a 

short extract of it that serves as a written testimony. I will provide 

an even shorter version in my oral remarks so that we can turn 

to any questions that you might have on the material. 

Briefly, the facts are as follows. CBO projects that the Federal 

budget deficit will be $477 billion in fiscal year 2004, will diminish 

to $362 billion in 2005, $269 billion in 2006, and then will steadily 

diminish thereafter until the budget reaches balance at the end of 

the budget window. 

These deficits, while large in dollar terms—$477 billion is the 

record in dollar terms—are 4.2 percent of GDP in 2004, dropping 

to 3 percent of GDP and 2.1 percent by 2006. So relative to the national income and the economy, these are not the largest deficits. 

Over the 10-year budget window, as the slide shows, we have a 

cumulative deficit of $1.9 trillion. Because the budget is largely in 

balance roughly after 2011, the 5-year total is the majority of that 

$1.4 trillion. 

A different way to look at the situation—a different fiscal barometer—is the cumulative effect of deficits or debt relative to GDP in 

the economy, and in these projections we see debt relative to GDP 

rising from about 38 percent at the beginning of the budget window 

and hitting between 40 and 41 percent, where it stays until after 

2011 and then diminishes to about 45 percent. 

Now, since the projections that we put out in August two things 

have happened. The first is that the economy has performed better 

than we projected it at that time. The third quarter is much 

stronger than we had expected. And indeed, we have altered our 

near-term economic assumptions accordingly and it may be the 

case in fact that the fourth quarter, which the data are not yet 

available, is stronger yet than what is included in the projections 

that you see before you today.

6

Nevertheless, these economic growth rates will simply bring the 

cyclical recovery on more quickly and get us back to full employment. Our estimate of the capacity of the economy to produce has 

also been moved up since August. We have seen rapid productivity 

growth, and we have tried to adjust for that in our projections. And 

I can come back to that in a second. 

The second major innovation is legislative. Since August, over 

the 2004–13 budget window, the one we used last year, we have 

seen an increase of $1 trillion in the cumulative deficit. That 

change comes from $700 billion roughly—about $680 billion more 

precisely—in legislation, largely the Medicare prescription drug bill 

but also concurrent receipts, the Air Force’s Boeing tanker acquisition, appropriations and then roughly $300 billion from economic 

and technical sources, roughly evenly divided. And I can talk about 

the details of that. 

As has been noted, the CBO projections assume current law prevails over the baseline projection period. On the tax side, that assumes that tax law has the sunset of the 2001 and 2003 tax cuts 

as scheduled, and that is included on the outlay side. It also assumes that we have an ever-increasing reliance on the alternative 

minimum tax in the collection of our individual income tax receipts. So both of those are built into our baseline. 

On the outlay side, the notable features is that we assume the 

current programs on the mandatory side, but we also for discretionary spending include all appropriations on the books, including 

the $87 billion supplemental, and we inflate those only at the rate 

of inflation. So discretionary spending rises at 2.5 percent in these 

projections. 

Now, what I thought I would do in conclusion is to touch briefly 

on those three topics and then take your questions—first the ecoVerDate 0ct 09 2002 16:23 Mar 29, 2004 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 X:\HEARINGS\108TH\108-15\HBU027.000 RYAN PsN: RYAN

cbo1b.eps
7

nomic forecast, then the pattern of receipts and then the pattern 

of outlays.

On the economy, we do expect a robust cyclical recovery, and if 

we can go to the next chart, the key features are represented in 

this graph of actual versus potential GDP. The actual course of the 

economy is the light blue line, and we anticipate that economic 

growth will be rapid over the next 2 years, at 4.8 percent, and 4.2 

percent, and this will bring us back to potential and at the same 

time we will see the unemployment rate diminish as the economy 

comes closer to utilizing its capacity fully. 

To the extent that the economy grows faster over that period 

than we projected, it will close that gap more quickly, but in the 

long run the capacity of the economy to produce and the long-run 

revenue potential that it will deliver is driven by the dark blue 

line, which is the potential GDP. And there the big news has been 

productivity in the U.S. economy. 

As we detail in the report, we have experienced a recent period 

of very rapid productivity growth of origins not well understood, 

and in the interest of acknowledging the increased potential for 

production in the U.S. economy, we have raised the potential for 

GDP, but we haven’t really changed its long-run growth rate. So 

we get a one-time increase in the level. That gives us more room 

to grow quickly and our projections assume that we will. They assume that we can grow quickly without large amounts of inflation, 

and our projections include a modest inflationary environment, 

both over the near term and over the long term where we have lowered our long term rate of inflation modestly. 

As it turns out, the budgetary impact of these various changes 

is on balance a little bit negative. In the near term, the faster economic growth is a good piece of news from a budgetary point of 


cbo2b.eps
8

view. Over the longer term, the combination of higher health costs 

lowers the fraction of compensation that comes in the form of taxable wages, and lower inflation on net has a modestly downward 

impact on the budget. And as a result, we get a net negative, which 

is really not quite substantial from our economic assumptions.

In the next slide, receipts are shown as the dark line at the bottom. The bottom dotted line is the historical average in the United 

States from 1962 forward, about 18 percent of GDP collected in 

revenues by the Federal Government. These projections have revenues rising rapidly at a rate of something in excess of 7 percent. 

The economy is growing, including inflation, growing at 4.7 percent. So we are seeing revenues rise faster than GDP in these projections. 

As a result, revenues rise from 15.8 percent of GDP this year, 

which is a low number, the lowest number we have seen since the 

1950s, to 20.1 percent in 2014. That growth in revenues comes 

from two sources. One source is the expiration of various tax provisions, first the partial expensing provision at the end of 2004, then 

the provisions in EGTRRA and JGTRRA, and with those we see 

the sunsets raising revenues. That contributes to about 2.3 percentage points or a little over half of that rise. 

The remainder comes from other sources. It comes from the fact 

that real growth in the economy raises real incomes and moves 

people into higher tax brackets. That is one source of revenue 

growth. It comes from the presumption in these projections that we 

will see capital gains realizations return to closer to their normal 

relationship with the economy, and we will get more capital gains 

tax receipts as a result. 

During this period as well, we will begin to see the retirement 

of the baby boom population and with that will come the cashout 


cbo3b.eps
9

of tax preferred savings accounts like IRAs and 401(k)s. That will 

contribute as well to receipts into the Federal coffers. 

And finally, as I mentioned earlier, the alternative minimum tax 

will become increasingly important both as a revenue source and 

in the number of taxpayers that it affects. We have a discussion 

in chapter 4 of the report pointing out that under our baseline projections the number of individuals affected, the number of taxpayers affected by the AMT, rises from about $3 million to close to 

$30 million at the peak. Depending on how things proceed, those 

receipts could become as important as 7 percent or so of individual 

income tax receipts. 

On the outlay side, the light blue line at the top, we assume that 

current law will deliver a growth in mandatory spending that is 

about 5.5 percent a year over the budget window. That is going to 

increase largely because of the effects of Social Security, Medicare, 

and Medicaid to the point where in the last year, 2014, the growth 

rate will be 6.5 percent. And that is the beginning of a long-run 

interaction between rising health care costs in the U.S. economy 

and an aging population that will lead Social Security, Medicare 

and Medicaid, the latter two programs in particular, to demand an 

increasing fraction of budgetary resources, or indeed national income, on the current track. 

On the discretionary side, as I mentioned earlier, we include the 

$87 billion supplemental increased at the rate of inflation. If one 

were to remove that $87 billion for each of the 10 years and the 

inflation and the debt service associated with it, it would lower the 

baseline projected deficit by $1.1 trillion over this 10-year period; 

so the inclusion following baseline rules contributes $1.1 trillion in 

these projections. And as well, I would note that the assumption 

of growth at 2.5 percent is at odds with past growth rates, which 

have been much higher, and we present in the report as a result 

some broad brush alternatives that would lead to different budgetary outcomes. 

I think the fair message of the report is that it anticipates cyclical recovery. It gets the economy back to potential. It is an economy that grows at a relatively rapid rate, and our productivity 

growth assumptions are laid out in the report. As a result, policy 

choices will matter for where we actually end up.

10

And in the final slide and in the report, we sketch the ones that 

stand out in most discussions. The impact of expiring tax provisions is laid out in considerable detail in a table in chapter 4. This 

includes not only the provisions of EGTRRA and JGTRRA but all 

expiring tax provisions. We include an impact of the reform of the 

alternative minimum tax. Here reform should be taken as a loose, 

stylized reform in which we index the alternative minimum tax for 

inflation so that no one ends up paying the AMT unless he is really 

rich. The effects of inflation alone don’t put you on AMT. And the 

consequences there, about $4.5 billion over 10 years, are shown. 

Finally, some outlay projections for discretionary spending that 

are both faster and slower than the baseline. At the top increasing 

discretionary spending at its historical rate would have a consequence of about $3.2 trillion over the 10-year budget window, 

whereas removing the effect of the supplemental, as I mentioned, 

would be worth $1.1 trillion, or an absolute freeze would reduce the 

10-year budget deficit by $1.3 trillion. 

Those I think make clear that the range of budgetary outcomes 

is considerable from the perspective of policy decisions that the 

Congress and the administration might make, and we also try to 

display in Appendix A the range of budgetary outcomes that might 

come from simple uncertainty over the future path of the economy 

and the technical assumptions associated with it. 

So with that I would close. These are our baseline projections 

constructed according to the standard procedures. We have also 

displayed the economic uncertainty and some of the policy uncertainty that surrounds them, and I will be happy to go through it 

in any way that you might desire and look forward to your questions. 

[The prepared statement of Douglas Holtz-Eakin follows:]


cbo4b.eps
11

1That estimate includes the increased interest payments on Federal debt attributable to legislative changes. 

PREPARED STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL

BUDGET OFFICE

Chairman Nussle, Congressman Spratt, and members of the committee, thank 

you for giving me this opportunity to present the Congressional Budget Office’s 

(CBO’s) budget and economic outlook for fiscal years 2005–14. CBO projects that 

under current laws and policies, the Federal Government will incur a total budget 

deficit of $477 billion this year and $362 billion in 2005 (see table 1). Such a deficit 

for this year would set a record in dollar terms, but at 4.2 percent of the nation’s 

gross domestic product (GDP), it would represent a smaller share of the economy 

than the deficits of the mid-1980s and early 1990s. In the absence of further legislative changes, deficits would diminish after their peak in 2004, although outlays 

would continue to exceed revenues for most of the next 10 years. Deficits are projected to total $1.4 trillion for the 5 years after 2004 and $1.9 trillion for the 2005–

14 period. 

By statute, CBO’s baseline projections must estimate the future paths of Federal 

revenues and spending under current laws and policies. The baseline is therefore 

not intended to be a prediction of future budgetary outcomes; instead, it is meant 

to serve as a neutral benchmark that lawmakers can use to measure the effects of 

proposed changes to taxes and spending. 

New legislation can significantly affect the budget outlook. For example, laws enacted since CBO’s previous baseline projections were published in August have increased spending by an estimated $681 billion (0.5 percent of GDP) between 2004 

and 2013. 1 Much of that total stems from the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Public Law 108–173). The outlays resulting 

from that law will steadily increase between 2006 and 2013, totaling nearly $400 

billion over the 2004–13 period (not including debt-service costs). 

The baseline projections reflect CBO’s forecast of robust economic growth for the 

next 2 years. By late 2003, stronger investment by businesses, a weaker dollar, and 

a rising stock market—augmented by expansionary monetary and fiscal policies—

were spurring economic activity. CBO forecasts that real (inflation-adjusted) GDP 

will grow by 4.8 percent in calendar year 2004 and by 4.2 percent in 2005 and that 

the unemployment rate will fall to 5.8 percent in 2004 and 5.3 percent in 2005. Between 2006–14, the annual rise in real GDP will average 2.7 percent, CBO projects. 

Even if economic growth turns out to be greater than projected, however, significant long-term strains on the budget will start to intensify within the next decade 

as the baby boom generation begins to reach retirement age. Federal outlays for the 

three largest retirement and health programs—Social Security, Medicare, and Medicaid—will consume a growing share of budgetary resources 

even under moderate assumptions about the programs’ growth, rising from over 

8 percent of GDP in 2004 to more than 14 percent in 2030. Such increasing demands on spending will exert pressure on the budget that economic growth alone 

is unlikely to alleviate. 

THE BUDGET OUTLOOK

CBO projects that if current laws and policies remain unchanged, Federal deficits 

will begin to decline after this year. In the ensuing years, under CBO’s baseline, 

deficits drop as a percentage of GDP, from 4.2 percent in 2004 to 3.0 percent in 2005 

and 1.7 percent in 2010. After 2011—if the tax cuts enacted in the Economic Growth 

and Tax Relief Reconciliation Act of 2001 (EGTRRA) expired as scheduled, growth 

in discretionary spending continued to be limited to the rate of inflation, and other 

policies stayed the same—the budget would essentially be in balance. 

Over the 2004–14 period, outlays are projected to grow at an average annual rate 

of 4.7 percent and to remain near 20 percent of GDP. That level would be slightly 

below the average share of the economy devoted to Federal spending since 1962 (see 

figure 1). 

The constant share of outlays as a percentage of GDP, however, masks opposing 

trends in mandatory and discretionary spending. Under the assumption that no 

changes in policy take place, spending for entitlements and other mandatory programs is projected to grow by 5.5 percent a year—faster than the rate projected for 

the economy as a whole. Such growth is driven largely by spending for Medicare 

and Medicaid, which is projected to rise at average rates of 9.0 percent and 7.2 percent a year, respectively, from 2004 through 2014. Toward the end of that period, 

Social Security spending is also expected to grow faster than the economy as the 

baby boom generation begins to retire. 

12

2That projection includes an extrapolation of the $87 billion in supplemental appropriations 

for 2004 enacted in November 2003 to fund defense spending and reconstruction in Iraq and 

Afghanistan. 

CBO projects discretionary spending as specified in the Balanced Budget and 

Emergency Deficit Control Act of 1985 (using the GDP deflator and the Employment 

Cost Index for wages and salaries). The combined rate of growth of those factors 

is about half of that projected for nominal GDP. As a result, the baseline projection 

for discretionary outlays falls from 7.8 percent of GDP in 2004 to 6.4 percent in 

2014. If instead such spending kept pace with the growth of GDP (and the other 

assumptions incorporated in the baseline remained the same), discretionary outlays 

would maintain a share of about 7.8 percent of GDP throughout the projection period and the deficit in 2014 would be $323 billion, or 1.8 percent of GDP (compared 

with a small surplus for 2014 under the baseline’s assumptions). 2

Revenues are projected to total 15.8 percent of GDP this year—about 2.5 percentage points below the average since 1962 (18.2 percent). As the economy continues 

to improve and certain tax provisions expire, revenues will increase to 16.9 percent 

of GDP in 2005, CBO projects. In 2006 through 2010, rising income and the expiration of more tax provisions will push revenues up to about 18 percent of GDP, by 

CBO’s estimates. In the baseline, projected receipts rise more rapidly after the 

major provisions of EGTRRA expire at the end of 2010, reaching 20.1 percent of 

GDP in 2014. If those provisions—together with the expiring provisions of other tax 

laws—were instead extended and all of the other assumptions underlying the baseline were held constant, receipts would be 18.1 percent of GDP in 2014, and the deficit would total $443 billion, or 2.4 percent of GDP. 

Debt held by the public (the most meaningful measure of Federal debt in terms 

of its relationship to the economy) is anticipated to equal 38 percent of GDP at the 

end of this fiscal year. Under CBO’s baseline, that debt will stabilize at around 40 

percent of GDP through 2011, at which point the Federal Government’s diminished 

need to borrow will reduce the growth of such debt. 

Since CBO last issued its baseline (in the August 2003 Budget and Economic Outlook: An Update), the cumulative deficit over the 2004–13 period has increased by 

nearly $1 trillion, or 0.7 percent of GDP (see table 2). About 70 percent of that total 

results from new legislation, such as the Medicare law. Another $171 billion stems 

from economic factors—mainly the decline in CBO’s forecast for inflation, which reduces estimates of both revenues and outlays (although the effect on revenues is 

moderately larger). Changes in projections of the unemployment rate, real GDP, and 

other variables also play a role. Technical revisions to CBO’s baseline—mostly on 

the revenue side of the budget—account for another $134 billion of the addition to 

the cumulative deficit over the 2004–13 period.

Chairman NUSSLE. Thank you. Thank you for your testimony, 

and we appreciate the professionalism that the report was put together in and all of the folks who work at CBO should be commended for their work on this, because I know it is quite a job getting this all together for us. We appreciate it. 

I wanted to make a couple of comments before I start. I basically 

have only a couple of questions. First of all, just to let the committee know and to let those that are listening know that deficits 

do matter. I said that last year. I said that the year before. I will 

open it again by saying that the deficits that we are hearing about 

again today from the Director—and we will continue to hear about 

for some time—do matter in the overall scheme of things. 

This committee has led the effort, and we produced a very austere budget last year, led the effort to pass the budget, and with 

very few exceptions stuck to that budget. It wasn’t the budget that 

in final analysis we passed out of this committee, but I think we 

should always remember that we have led the effort when it comes 

to controlling spending on this committee, and I am proud of that. 

Let me just say as we set the table for the coming year we will 

do it again. The President is certainly ready to present his budget 

on Monday, and I have been hearing different things about it, and 

I am increasingly impressed at the level of interest that we are 

13

hearing from the administration on controlling spending. I hope 

that they hear even more between now and Monday, when the 

budget is presented, because that is a message that they need to 

hear. 

We need the President to lead that effort to control spending. It 

cannot only be done from this committee and be successful. We will 

do it if no one else takes the lead, but we hope that as the President presents his budget on Monday and as we ask for testimony 

from his OMB Director coming up next week that the administration will lead the effort on controlling spending, because these are 

spending-driven deficits, and that is the first question that I wanted to get to. 

There are some—I hear the arguments—I heard them in Iowa of 

all places. I don’t know what necessarily was so special about Iowa 

over the last few months, but I have heard in Iowa this issue about 

how Republicans have squandered the surplus, and if you would 

parachute into the committee room today and having not known 

much about the last 3 or 4 years of history, I could see how you 

might come to that conclusion, but since we all have subscriptions 

to newspapers and know exactly what had been going on with the 

war and Iraq and Afghanistan, the global war on terrorism, 9/11, 

the economic recession that the President inherited from the previous administration, et cetera. I would hope there would be a better understanding of exactly how we got here. 

But just in case we need a refresher course—and judging from 

the media reports that I saw yesterday, I think it probably would 

bear repeating—would you please review for us once again the 

largest factors in reducing the $5.6 trillion surplus and led us to 

today’s point in time in borrowing, what the different amounts or 

what the different factors would be or percentages would be that 

got us to this particular point in budget history? 

Mr. HOLTZ-EAKIN. Well, certainly. If one were to compare, for example, the 2004 projection, the $477 billion, with the projection of 

a surplus made in 2001, 40 percent of that decline would be from 

economic and technical factors. The remaining 60 percent would be 

equally divided between legislative initiatives on the receipts and 

legislative initiatives on the outlay side. 

If one were to extend the 2002–11 budget and look at the whole 

thing and do the same kind of a decomposition of where the surplus went, one would find 40 percent came from economic and technical factors: recession, equity market fall-off, and associated declines in receipts. Then on that longer horizon, 30 percent can be 

traced to legislative initiatives on the receipt side and 70 percent 

to the legislative initiatives on the outlay side. 

Chairman NUSSLE. I have actually—we can use that chart too, 

but why don’t you go to the next one. No, you were there, right 

there—No. 4. 

This is the chart we have been using. We have now added to it 

based on numbers that CBO has provided for us in your report. Is 

this what you are referring to? I think you were just explaining the 

last line there, the last column for fiscal year—were you explaining 

fiscal year 2005, or was that——

Mr. HOLTZ-EAKIN. The example I gave was fiscal year 2004, 40 

percent economic and technical and the remainder equally divided. 

14

And then for the budget window as a whole, 2002–11, if you go 

back and look at what went on and do the same kind of decomposition, it is 40 percent economic and technical, 30 percent on the legislation on the receipts side, 70 of the remainder, 30 and 70 on the 

receipts and outlays sides respectively. 

Chairman NUSSLE. And, again, this is right out of the CBO report and these are numbers that are readily available, but I don’t 

want anyone to either bury their head in the sand or to forget 

where we have come from. There certainly is a portion of this that 

was done to stimulate the economy. In fact, it was done in some 

respects in a bipartisan way. Again, a lot of the spending to support the global war on terrorism, the war in Iraq, a lot of the rest 

of the spending was done in a bipartisan way. In fact, we were able 

to add up the amount of proposals of reconciliation—excuse me, 

motions to recommit that were offered by the Democrats this year, 

and we have about $900 billion of extra spending just through motions to instruct and motions to recommit. So certainly a lot of the 

spending was deliberate. 

I think the factor that was certainly out of anyone’s control was 

the economic impact, and that is that—the bottom shaded portion 

there, which was as much as 68 percent in 2002 and now as you 

said 40 percent in 2004 and 2005. 

The second question I had for you is: I do hear that the tax cuts 

themselves caused the deficits, that there weren’t any other factors. 

I am interested if you would tell us how much of the total deficit 

was caused by tax relief. The way I have it added up, even without 

tax cuts, even without tax relief, we would still be in deficit. We 

would still be running deficits even without the tax relief packages 

that were passed. In fact, they may even be deeper as a result of 

the fact that the economy would not have recovered. I know that 

is difficult to play the guessing game on what would have happened without tax relief vis-a-vis economic growth but just from a 

dollar amount, the way I have read it the tax cuts not only did not 

cause the deficit, we would be in deficit anyway even without the 

tax cuts.relief packages caused the deficits? 

Mr. HOLTZ-EAKIN. Certainly. There are two different questions, 

one of which is simply the budgetary math in the absence of economic feedback. And as I said before, for 2004 the revenue decline 

on the legislative front is $268 billion. So if that were not present, 

we would still—on just budgetary math—be below zero: take $260 

[billion] back from the $477 [billion]. 

The deeper question of what would have been the path of the 

economy in the absence of tax cuts is not something I have a ready 

and simple answer to. But it is, I think, pretty much the case that 

if one looks back at the impact of the fiscal policy, the entire package of a swing from surplus to deficit, roughly 6 percentage points 

of GDP over a 3-year period in the presence of the economic headwinds that we faced, the equity market fallout, in which we saw 

the stock markets fall; a sharp decline in business fixed investment; terrorism events; war in the Middle East; corporate scandals 

and the necessity of Sarbanes-Oxley legislation the fiscal policy 

served to support the economy and support demand at a time when 

the economy was relatively weak. So in that sense certainly deficits 

matter and they matter in different ways, and in an economy that 

15

is weak, they support a demand. The shift from national saving to 

national spending was beneficial. Going forward, it might be a very 

different story. If you had a full-employment economy, you wouldn’t 

need that kind of support for demand and the shift from saving to 

spending would not be as beneficial and indeed could have economic consequences that were not particularly desirable. 

Chairman NUSSLE. Thank you. Mr. Spratt. 

Mr. SPRATT. Dr. Holtz-Eakin, the recession was over in November of 2001, according to the National Bureau of Economic Research I believe. Growth surged in the third quarter of this year, 

this past calendar year, and still the deficit picture has deteriorated radically, dramatically since last January when you were 

here presenting the same report. 

If you look at the same time frame, 2004–13 for last year’s report, during that period of time last year you foresaw on the assumption that there would be no policy changes a cumulative surplus of about $1.350 trillion. 

Now if you look at the same time frame in this year’s report, 1 

year later, there is a cumulative deficit of $2.350 trillion. Basically, 

there is a swing of about $3.6 [trillion], $3.7 trillion over a 1-year 

period of time. How do you account for that? 

Mr. HOLTZ-EAKIN. Well, as I mentioned, if one goes from the $2.4 

trillion back to the August number, which was a deficit of $1.4 trillion, that $1 trillion swing is composed of roughly $700 billion in 

legislation, including debt service and $300 billion in economics 

and technicals. 

If I recall correctly, in going from January to August last year, 

that swing, which was $2.7 trillion, consisted of—I forget the exact 

amount, which was economic and technical—probably $700 billion 

or so, and probably $1 trillion—ballpark—on legislation. Some of 

that was the tax cuts in the spring that was much at the front end 

of the budget window, so that was a legislative initiative on the tax 

side, and then a larger amount was outlays, including supplementals, which were carried forward in the baseline. But I think that 

contributed to the large majority of the swing, from $1.3 trillion in 

surplus to the $1.4 [trillion] in deficit. 

Mr. SPRATT. All those factors, legislative initiatives taken here in 

the Congress, principally the surplus deteriorated, got worse by 

$3.65 billion, or $3.7 trillion over the last—over that time frame 

just in 12 months time. 

Mr. HOLTZ-EAKIN. It is largely legislative, yes. 

Mr. SPRATT. Going back, as you did with your bar chart a minute 

ago, to January of 2001, when we received the first forecast from 

OMB and CBO, is what the expected cumulative surplus would be 

between 2002–11, the number from CBO I think was $5.6 trillion, 

a slight difference between the two. 

Yesterday I asked your staff when they presented the budget 

how much have you made in the way of economic and technical adjustments that reduce that original $5.6 trillion surplus. In other 

words today, knowing what you know, what would you project the 

surplus for that period, 2002–11, to be? I was told it was $3.4 trillion in economic and technical adjustments. 

Mr. HOLTZ-EAKIN. That looks about right. 

16

Mr. SPRATT. That means that we didn’t really have a surplus of 

$5.6 trillion on which these big tax cuts were predicated. It was far 

less than that over that same period of time. It was more like $2 

[trillion], $2.3 trillion, something like that. Is that correct? 

Mr. HOLTZ-EAKIN. That is what it looks like today, yes. 

Mr. SPRATT. And all of that was Social Security, was it not? The 

Social Security surplus was $2.4 [trillion], $2.5 trillion. Once you 

adjust for economic and technical, there was no surplus over and 

above Social Security, was there? 

Mr. HOLTZ-EAKIN. I am not familiar with the Social Security 

number, but we will stipulate you are right. 

Mr. SPRATT. Let me also get clear what was said earlier, because 

I may have written it down wrong when I read your book last 

night, but it is my understanding that you say in this book, this 

presentation, that if the tax cuts are not renewed and if discretionary spending is basically kept at current services baseline, the 

budget will just about balance over the next 10 years by itself. 

Mr. HOLTZ-EAKIN. That is the baseline projection, yes. 

Mr. SPRATT. So the tax cuts are a critical—if they weren’t renewed, then this situation would go away in 10 years? 

Mr. HOLTZ-EAKIN. If all the aspects of this policy package were 

adhered to for 10 years. 

Mr. SPRATT. I will let you clarify that, because there is a chart 

in the Washington Post today that omits one of the critical assumptions that goes along with this, and that is that discretionary is 

held to no more than inflation over the next 10 years. Those two 

factors together, then the budget would be in balance in 10 years’ 

time? 

Mr. HOLTZ-EAKIN. Yes. That is the baseline projection. 

Mr. SPRATT. By the same token, I read that—or conversely, I 

read that if the tax cuts were not renewed—if they were allowed 

to expire as scheduled according to their own original legislative 

terms, then we would have in the terminal year, the last year of 

your forecast here, 2014, a deficit of I think $484 billion, something 

in that range. 

Mr. HOLTZ-EAKIN. I think it is a little smaller but it is close to 

that. 

Mr. SPRATT. So we wouldn’t be able to cut the—according to your 

projection here, unless you take other actions, you would not be 

able to cut the deficit—today’s deficit of $477 [billion] in half, even 

over the next 10 years, if you renew the tax cuts. 

Mr. HOLTZ-EAKIN. If you just do that policy from the baseline, 

yes. 

Mr. SPRATT. Let me also mention one thing, because it is—I understand was a subject of discussion in the other body this morning 

when you testified before the Senate Budget Committee. You have 

included, as the law requires you to include, the supplemental for 

defense and international affairs of about $87 billion adopted in 

2004, because you are required by law to put that in the baseline 

for the next year, and therefore when you extend it out over a 10-

year period of time you have got—I think you told us—$880 billion 

for that addition, plus interest, which is $227 billion I believe—

about $1.1 trillion. 

17

Could I show you a little chart and ask you to take it back and 

let your staff work on it and let us know if it comports with your 

own analysis? Because what we have done is taken another analysis from CBO, namely on the defense budget, and used those 

numbers. The argument being that if you remove the $800 billion 

for the supplemental, most of which went to the deployments in 

Iraq and Afghanistan, if you remove that, you have got to put 

something in that place, because then you don’t have anything included for the likely continuation of those deployments or anything 

included for international aid which we are still providing to Afghanistan, still providing to Iraq. We won’t be—you can remove 

that, but you are left with an unrealistic baseline. This thing is not 

exactly self-explanatory. That is the best I can do to hand it out. 

If I put it up on the screen, you would never be able to see it. 

But basically we went back to your study on the defense budget 

in which you essentially said once you allow for contingency costs, 

that is, for the worldwide—or that was not in your study, but there 

ought to be some allowance made here for the global war against 

terror, and we have got, included starting at this year’s level, 51 

bills down to 31, down to 30, down to 20 and tapers off in the low 

to mid $20 billion a year to maintain that effort, and I don’t think 

that is an unrealistic effort. But you don’t have to comment on 

that. 

The other three items, the risk, cost risk in weapons systems, 

procurement and development now underway was a number that 

you developed for your study based on historical experience with 

the defense budget. The next was benefits based upon the experience we have had recently and the things that are on the agenda, 

the risk of personnel costs going up significantly due to various policy changes like TRICARE for life. 

Finally the total for that comes over a 10-year period of time to $700 billion if you add all of those things. Fifty declining to 24 for 

the global war against terror. The items that you included in your 

defense study as risk over and above the budget. And in addition 

there is another factor. You take what we are spending on defense 

this year and each year you adjust it by inflation, and yet that 

amount, your current services baseline projection of defense spending, is less than the so-called FYDP, the Future Years Defense 

Plan, in the Department of Defense. We know more or less what 

is in that budget and we know it is more than what you have got 

in current services. 

So if you also adjust for the DOD’s, Department of Defense, 

FYDP, what they have got as opposed to what you get automatically by simply adjusting every year for inflation, there is another 

item to be added. That is the item of A, and it adds up to about 

$447 billion, the difference between current services and the FYDP 

for the period of time we are talking about. 

And then if you assume that if we are going to be in Afghanistan, we are going to be in Iraq, we are going to be doing the 

things we are doing, we are probably going to have a larger budget 

for international affairs as a small plus-up in international affairs. 

On top of that you don’t have to include it to get to $1.1 trillion. 

What I am suggesting is that when you take that $87 [billion] 

out on the basis that it was arbitrarily included to comply with 

18

black letter law and put something in its place, what you put in 

its place is pretty close to what you get anyway by extrapolating 

forward the $87 billion over the 10-year period of time. 

Would you care to comment on that? 

Mr. HOLTZ-EAKIN. Well, certainly we would be happy to go back 

and go through this and make sure we come up with the same 

kinds of costs for this particular policy scenario. Indeed, this simply 

constitutes another future scenario for the course of policy. The 

baseline is meant to be a neutral benchmark against which policies 

are measured, and this would be one. I would be happy to go back 

and make sure that these numbers, which strike me as quite close 

to our original estimates, are still good estimates, and we will get 

back to you on it. 

Mr. SPRATT. We very much appreciate your response to it, and 

thank you very much. 

[The information referred to was subsequently provided to the 

House Budget Committee Democratic staff.] 

Chairman NUSSLE. Mr. Brown. 

Mr. BROWN. Thank you, Mr. Chairman. Mr. Holtz-Eakin, we certainly appreciate you coming today and sharing all this information 

with us, and I was just going to follow up on John’s [Spratt] question, if I may. The $87 billion is factored in through the—I guess 

the 10-year cycle, and I was just wondering if there are other 

items, these nonrecurring items, which also could be identified as 

factors through this cycle too. Do you have any kind of an estimate 

of what those numbers might be? 

Mr. HOLTZ-EAKIN. In principle, that is possible. I can’t think of 

anything else major that would enter into these projections. 

Mr. BROWN. I was just thinking of building battleships, aircraft 

carriers, or some of the other large initiatives that are actually 

there. 

Mr. HOLTZ-EAKIN. As the Congressman mentioned, there is a Future Year Defense Program, which lays out the administration’s 

initiatives in that area, and we have in a separate analysis attempted to look at the budgetary consequences of that. That is 

slightly different than the discretionary baseline you will see here, 

and it is different again from including one-time events, which you 

might plausibly argue wouldn’t continue. So the baseline includes 

all appropriations which are on the books at the end of 2004 and 

extrapolates them in a fairly mechanical fashion. 

Mr. BROWN. One other question. I serve on the Transportation 

Committee, and we are in the process of trying to get the reauthorization bill. What dollar figure are you using in these figures? 

Mr. HOLTZ-EAKIN. I think we have in this baseline $480 billion 

over 10 years, and that represents a continuation of the extension 

that was passed last fall. 

Mr. BROWN. OK. 

Mr. HOLTZ-EAKIN. I will get the precise number with my staff. 

Mr. BROWN. Somewhere less than $300 [billion]—I guess—let’s 

see. It would be $48 billion a year. Right? 

Mr. HOLTZ-EAKIN. A little under $300 billion for the 6-year reauthorization window. 

19

Mr. BROWN. Right. What I think we are looking at in the Trans- portation Committee is some $375 billion, and so this would change 

our numbers too if in fact that was passed. 

Mr. HOLTZ-EAKIN. Yes, to the extent that there was a new policy 

beyond the continuation, that will be priced the next time in August. 

Mr. BROWN. Thank you. 

Chairman NUSSLE. Mr. Moran. 

Mr. MORAN. Thank you, Mr. Chairman. Let’s go back over the current deficit. You estimate it to be $477 billion for the current 

fiscal year. I heard you say earlier that $268 billion was attributable to tax 

cut legislation in 2004. 

Mr. HOLTZ-EAKIN. That is right. If I read my notes right. 

Mr. MORAN. OK—$268 [billion] is more than 40 percent of $477 

[billion]. So I understand the 40 percent is over a 10-year period, 

but clearly for the current budget deficit the tax cuts were the predominant factor? 

Mr. HOLTZ-EAKIN. The number I gave was as a measure of the 

swing from surplus to deficit, which is larger than the deficit itself. 

So that is the difference there. 

Mr. MORAN. But I still think it bears out a contention that the 

tax cuts were the principal factor in the current year’s deficit. Is 

that not accurate? 

Mr. HOLTZ-EAKIN. The number I gave was the swing from surplus to deficit, and the tax cuts contributed about 30 percent of 

that spending legislation; economic and technicals, the rest. 

Mr. MORAN. Well, the point when you add the tax cuts with the 

war in Iraq, both of which were an issue of the prerogative of the 

President, it was certainly up to the President to decide whether 

or not to cut tax cuts. That was not essential, and as we are finding out more clearly every day, the Iraq war was a war of choice, 

not of necessity. And I think when you consider that, that these 

deficits were not inevitable, that they were the result of decisions 

made by this administration and the majority, although a bare majority of this Congress. 

In the outlook volume that you presented to us, Dr. Holtz-Eakin, 

it says that CBO has conducted detailed analysis of a sample of tax 

returns, which is to suggest that some of the decline in receipts 

which was believed to be temporary last summer is likely to be permanent. I would like to get a sense of whether as a result of that 

there is any real hope for achieving the President’s objective stated 

in the State of the Union Address that he plans to cut the deficit 

in—was it the deficit or the debt, because either one is impossible, 

certainly improbable, within 5 years. Given the fact that he wants 

to make permanent all of the tax cuts and the fact that there has 

been this permanent reduction in tax receipts, do you see anything 

that would confirm the assertion of some who have said that over 

the last 2 years cutting tax rates would increase tax revenues to 

accomplish the President’s stated objective? 

Mr. HOLTZ-EAKIN. Well, I can’t speak to the President’s objectives, and we will certainly analyze his budget when it is delivered. 

I know that when we do each projection we start it at the ground 

and work up all the details, and in scrubbing the revenue numbers, 

20

there are always gaps left between what we think we should be 

getting in terms of receipts given the state of the economy and the 

structure of the tax code and what it looks like will be coming in, 

and those gaps are called technicals. And what goes in are various 

things. 

Mr. MORAN. I don’t want to interrupt but I know we are going 

to run out of time. You said that the traditional revenue is about 

20 percent of GDP, I understand, and if the tax cuts were made 

permanent it would be about 15 percent, 15, 16 percent. 

Mr. HOLTZ-EAKIN. That is not quite——

Mr. MORAN. No? 

Mr. HOLTZ-EAKIN. No. The average has been about 18 percent of 

GDP. If you go to the end of the budget window, these projections 

have receipts of 20.1 percent of GDP. 

Mr. MORAN. But that is assuming that the tax cuts are not permanent, that the President does not achieve his objective of making 

them permanent. And the point I am getting to is that if we were 

to follow through on the President’s legislative priority of making 

permanent the tax cuts, then the receipts would be considerably 

less and in fact it would negate the achievement of his other objective, which is to eliminate the deficit within—halve the deficit in 

5 years. Is that not accurate? I think that is supported by all of 

your numbers. 

Mr. HOLTZ-EAKIN. The numbers that I know—I again can’t speak 

for the President, but of the rise in receipts, 2.3 percentage points 

comes from sunsets. So if you took that out mechanically, you 

would be at 17.8 percent of GDP, and that would be what I would 

refer to as a very conventional budgetary static estimate. In our 

baselines we try to incorporate the impact of the tax law on the 

economy in the numbers that we talk about in terms of what it 

would cost to make tax cuts permanent things. We don’t have any 

economic feedback at all. 

Mr. MORAN. As Mr. Spratt pointed out in your table, it is 2.3 trillion, is the cost of making permanent the tax cuts. I am just factoring that in and suggesting that the two objectives of halving the 

deficit in 5 years or making permanent the tax cuts, they are mutually exclusive, and I think your numbers support that. 

Mr. HOLTZ-EAKIN. Well, what policies people pursue are clearly 

not something that I can decide, but I want to just make sure that 

it is clear that the table in chapter 4 has all expiring tax provisions, not simply those that can be traced to 2001, 2003, and the 

difference will depend on which ones are chosen. 

Chairman NUSSLE. Mr. Wicker. 

Mr. WICKER. Thank you. 

Mr. Chairman, I notice that my friend, Mr. Spratt, and my 

friend, Mr. Moran, have asked questions about what, in theory, 

would happen if the tax cuts were allowed to expire on time. Then 

I think I listened carefully and I think I heard Mr. Spratt say that 

he did not advocate a full return to the higher taxes that we had 

earlier. For example, I believe he said he did not advocate doing 

away with the additional child tax credit or the new 10 percent income tax bracket, things of that nature. I was glad to see him say 

that, Mr. Chairman, because that is something he and I can agree 

on; but it creates a problem in asking these questions about what 

21

would happen if we did certain things that I do not think very 

many of us in this room want to do. 

To me, when you take away a child tax credit, that is a tax increase; and when you eliminate a 10-percent tax bracket and push 

someone up to 15 percent or higher, that is a tax increase; and 

with what we have seen in the economy and where we need to go, 

I do not think we need to do that. When you eliminate partial expensing on small business, that is a tax hike, and I do not advocate 

that. 

When you go back to a higher marriage tax penalty, that is a tax 

increase, so I hope that when we are doing assumptions we can 

rule out some of these assumptions that we have asked questions 

about, because they are not realistic in terms of where we need to 

go with the American people. But let me ask you, Mr. Holtz-Eakin, 

about where we have been in the economy since the income tax 

cuts and other tax cuts that have been enacted. 

You would think, listening to some people, that we have gone to 

hell in a hand basket, but, actually, the economy is pretty good, in 

terms of the recent news. • Real GDP grew at a rate of 8.2 percent the third quarter of 

last year, back down to between 4 and 5 percent in the last quarter, but projected to be in that range for the entire coming year. • Manufacturing reached its highest pace of activity in 20 years 

at the end of last year. • Housing starts at their highest pace in 20 years. • Industrial production at a 6 percent annual rate of increase. • Real fixed business investment again growing faster than it 

has in years and years, and the Dow Jones Industrials up 26 percent. 

It is clear to me, and I think it should be clear to an objective 

observer, that the economy is coming back, and we do not need to 

do anything to dampen what seems to be a real good recovery from 

this recession which we inherited in the year 2000, 2001. 

In your opinion, Mr. Holtz-Eakin, do not you agree that this is 

good economic news and that we are going to see more of it and 

that a great deal of that is as a result of our actions in this Congress in reducing the tax burden on American families? 

Mr. HOLTZ-EAKIN. Well, I certainly agree that we were surprised 

by the strength of third quarter. We certainly did not anticipate 

that in August when we put together our projections. 

As you have seen in our projections, we do anticipate that the cyclical recovery will continue, and continue robustly, returning us to 

potential output in the U.S. economy. As I said earlier, I believe 

that the swing from surplus to deficit, when viewed looking backward, did tend to support the economy at a time when private demand was quite weak. We do not have a decomposition of that, but 

there is evidence to support that, yes. 

Mr. WICKER. Thank you, Mr. Chairman. 

Chairman NUSSLE. Mr. Neal. 

Mr. NEAL. Thank you very much, Mr. Chairman. 

Thank you, Mr. Holtz-Eakin. 

In response to my friend, Mr. Wicker: I know that the Massachusetts unemployment rate caught the national average for the first 

time in many, many years. At a meeting that I had with construcVerDate 0ct 09 2002 16:23 Mar 29, 2004 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 X:\HEARINGS\108TH\108-15\HBU027.000 RYAN PsN: RYAN
22

tion people yesterday, they tell me it is the worst it has been in 

memory, so perhaps something is happening in Mississippi that is 

not happening in the northeastern part of the country. 

Mr. Holtz-Eakin, let me talk to you about an issue that I know 

the chairman would tell you that I have been consistent on, even 

in my work at the Ways and Means Committee, and that is fixing 

the alternative minimum tax. 

The President’s budget I assume is going to call for a short-term 

fix, and could we not argue that the tax cuts during the last 3 

years have only exacerbated the problem in the sense that, on the 

one hand, we give tax cuts to people and, on the other hand, they 

get hit with the AMT and that revenue ends up going back to the 

Treasury. 

Mr. HOLTZ-EAKIN. You can certainly see the interaction between 

the AMT and the tax cuts in chapter 4. There is a box—Box 4–2—

which you can read at your leisure—that shows at the end of the 

projection window, when the tax cuts sunset, the sharp drop in 

AMT payers because their regular income tax liability will be high 

enough to keep them off the AMT. 

Mr. NEAL. Right. You estimated there will be 23 million taxpayers who will be subject to the AMT by the year 2014. 

Assuming that the Bush tax cuts expire and no other AMT fixes 

are enacted, can you estimate for me how many taxpayers will be 

subject to the AMT if the Bush tax cuts are extended, as he has 

requested, without any fix in the AMT? 

Mr. HOLTZ-EAKIN. I do not have the number off the top of my 

head. I would be happy to work with you about it. 

Mr. NEAL. That is part of the problem. Everybody is happy to 

work with me on it. We just cannot get it resolved. 

Mr. HOLTZ-EAKIN. I will get you an estimate. 

[The information referred to follows:]

LETTER FROM MR. HOLTZ-EAKIN IN RESPONSE TO MR. NEAL’S QUESTION REGARDING

THE ALTERNATIVE MINIMUM TAX (AMT)

CONGRESSIONAL BUDGET OFFICE, 

WASHINGTON, DC 20515, 

February 6, 2004. 

DEAR MR. NEAL: At my testimony on January 27, before the Committee on the 

Budget regarding CBO’s budget and economic outlook, you asked how many taxpayers would be subject to the alternative minimum tax (AMT) in 2014 if the recent 

tax cuts were extended without any change to the AMT. We estimate that, under 

those assumptions, about 40 million taxpayers in 2014 would be subject to the AMT. 

Under our baseline assumptions, the number would peak at about 29 million in 

2010 and then drop in 2011 after the tax cuts expire. If instead the tax cuts were 

extended, the number would continue to rise beyond 2010. 

If you wish further details on this estimate, we will be pleased to provide them. 

Sincerely, 

DOUGLAS HOLTZ-EAKIN, 

Director.

Mr. NEAL. That is different than getting it resolved. 

Thank you for qualifying that. 

Do you not think that people that advocate tax cuts and that 

have been consistent and even at moments vociferous in their support of tax cuts, do they not have some responsibility to those that 

are about to get bumped into an AMT situation that it would be 

23

appropriate for the tax cut advocates to do something about it, 

rather than leaving it to future generations to foot this bill? 

I mean, in deference again to the gentleman from Mississippi, he 

talked about how the tax cuts have been important here, and he 

does not want this tax increase, does not want that tax increase, 

and I understand that, but let’s remind people that the deficits belong to them, too, and that the debt belongs to them. But this notion that has become popular that will let future sessions of the 

Congress and future administrations deal with this AMT issue, 

does not that mean that we are also suggesting that we ought to 

let future generations of Americans deal with it as well? 

Mr. HOLTZ-EAKIN. I can tell you that I will leave it to the committee to assign the standards for public responsibility in assessing 

public policy, and you can ascribe the deficit only to the cumulative 

of net policies, and I could not parcel it out to net pieces in any 

scientific way. 

Mr. NEAL. Well, do you think we are going to tackle AMT in a 

serious way this year? 

Mr. HOLTZ-EAKIN. I would prefer not to speculate. 

Mr. NEAL. Let me take you to another favorite topic of mine, 

these U.S. corporations that go to Bermuda. 

The joint tax has estimated that we can collect $5 billion. We 

have 134,000 troops in Iraq, we have 12,000 troops in Afghanistan 

and at the cost of $1 billion a week; and we all know after the election there will be a request for another supplemental, tens of billions of dollars for Iraq. Wouldn’t it be very helpful that if we were 

to go out and collect the $5 billion that we could for these corporations who enjoy the protection of the American military and enjoy 

many of the other nice things that come along with being an American citizen except on tax day for these folks? 

Mr. HOLTZ-EAKIN. Again, which path for policy the Congress and 

the administration should take is really not something that I can 

speculate on. 

The joint committee, I think, has taken a good crack in making 

that estimate; and certainly it is one policy option available to the 

committee and the Congress as a whole. 

Mr. NEAL. Would it ease your projections if we were to collect the 

$5 billion? 

Mr. HOLTZ-EAKIN. If we added $5 billion in receipts it would 

lower the deficit $5 billion other things being equal. 

Mr. NEAL. Thank you very much. 

Chairman NUSSLE. Mr. Bonner. 

Mr. BONNER. Thank you, Mr. Chairman. 

Dr. Holtz-Eakin, I would like to just seek your definition as an 

economist. Our friends talk about tax cuts not being renewed, and 

I was hoping that the tax cuts would not expire. 

The way we think in my district in south Alabama, letting the 

tax cuts expire or not having the tax cuts be renewed would be 

equivalent to a tax increase, so, from your perspective, if this Congress or future Congresses does not make permanent if the tax cuts 

of 2001 and 2003 and those tax cuts do expire, is that a tax increase on the American people? 

24

Mr. HOLTZ-EAKIN. I would not be a professional economist. I 

could not give you two answers to that question. Let me give you 

two answers to that question. 

I think if you consciously attempt to raise more tax revenue from 

the same base, that is a tax increase; and that seems fairly 

straightforward to me. A key part of this would be—expectations 

in the private sector are the second thing. If people expect those 

tax cuts to be permanent, they would perceive their expiration as 

a tax increase. I think that is fair, and we have actually, in doing 

our projections, tried to think hard about how to handle that. 

Certainly, we build into our projections, the economic projections, 

the budget law on which they are based; and this tax law has lots 

of sunsets in it, so people will behave based on what they expect. 

We do not know if they expect the tax cuts to be permanent, expect them to sunset, or expect something in between, but it is generally consistent, and, as a result, the economic behavior in these 

projections is based on that. And what will happen actually when 

we get out to 2010, 2011, I do not know. 

Mr. BONNER. As a follow-up, because I have friends in Massachusetts and I have friends in Mississippi——

Mr. NEAL. Would the gentleman yield? 

Mr. BONNER. Be happy to yield. 

Mr. NEAL. You have a friend right here in Massachusetts. 

Mr. BONNER. I am looking at him, yes, sir. 

Mr. NEAL. You know that. 

Mr. BONNER. But to the constituents that you represent and to 

the constituents that I represent who have had difficulty getting 

jobs in the last few years, I guess my question again is to your 

background as an economist: Is there anything in the history of 

this country that would suggest that increasing taxes on people 

who are already struggling to find jobs is going to enhance their 

ability to find jobs? Will it be healthy for the economy if we increase taxes? 

Mr. HOLTZ-EAKIN. The correct answer to that, the scientific answer, is: It depends what you do along with that. If you do it in 

isolation, you bring budgetary resources into the budget. 

Mr. BONNER. So it will be the government’s money. 

Mr. HOLTZ-EAKIN. You know, a fair answer involves asking both 

parts of the policy package. If the money comes in and you spend 

it, we can analyze that. If the money comes in and you buy back 

debt, we can analyze that. So that is a careful answer. 

It would also depend on the state of the economy, quite frankly. 

As I have said to the chairman in the past, deficits certainly matter, but their impact differs, and it differs in this economy which 

is very weak, but we anticipate it will recover quite nicely. 

Mr. BONNER. Mr. Chairman, I yield back. 

Chairman NUSSLE. Mr. Edwards. 

Mr. EDWARDS. Mr. Chairman, these alarming deficits should be 

a wake-up call for the country and the Congress. For the second 

year in a row, we will have the largest deficits in American history, 

adding $852 billion to the debt on the backs of our children and 

grandchildren in just simply 24 months. These deficits are a cancer 

that will eat away at the long-term economic growth in America 

and put our children’s future at risk. They can also undermine SoVerDate 0ct 09 2002 16:23 Mar 29, 2004 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 X:\HEARINGS\108TH\108-15\HBU027.000 RYAN PsN: RYAN
25

cial Security and Medicare benefits for present and future seniors 

and will likely force cuts in vital programs for homeland security, 

education, defense, and health care. 

I believe the dirty little secret about these historic deficits is a 

country such as China had been purchasing this year and last 

enormous amounts of U.S. debt, so they now have a knife at our 

economic throat. So, if some future administration wants to negotiate, for example, a tough, fair trade deal with China or Japan, 

they can threaten the American economy by simply saying maybe 

it is time for them to turn in that debt, back to the United States, 

and doing so could devastate our economy. 

To put in perspective for those who might minimize the size and 

historic nature of these deficits, Dr. Holtz-Eakin—and I think you 

can answer this yes or no—prior to this administration, was not 

the largest single deficit in American history $292 billion in 1992? 

Mr. HOLTZ-EAKIN. Yes. 

Mr. EDWARDS. So, in actual dollar numbers, the fiscal year ’04 deficit will be $185 billion higher than the deficit was in the largest 

single deficit year prior to this administration. That is a 63 percent 

increase and the largest deficit in American history in any one 

year. Now, I am going to assume 4 percent costs of funding this $852 

billion debt that we have added to our children and our grandchildren. I think your assumptions assume 4.5 percent. I am going 

to assume we will get a little cheaper money, but 4 percent times 

$852 billion, Mr. Chairman, is $34 billion a year that our children 

and grandchildren will pay in interest on the national debt from 

these 2 years of deficit spending; and they will pay those taxes 

until the day they die. Now, to put that amount in perspective, since $34 billion goes 

over the heads of most of our family budgets, the United States 

Federal budget only puts $29 billion a year on all education programs, from Head Start, to kindergarten, through the 12th grade, 

so the deficit interest costs from 2 years, without that, we could 

have doubled our commitment to education and still had money left 

over. 

Now, to put it in more family budget terms, I would like to put 

in the record Mr. Chairman, that, using administration numbers 

and CBO, the Democratic staff of this budget committee estimated 

by 2013 a family of four will be paying $9,493 for their share of 

interest on the national debt. 

Perhaps those that talk about what is a real tax increase ought 

to look at the honesty of those numbers. 

Now in terms of the myth that we can solve these historic high 

deficits by simply being a hawk on cutting spending, Dr. HoltzEakin, am I not correct that in three of the five largest programs 

of the thousands of Federal programs, five of them represent 70 

percent of every Federal dollar spent, defense, Social Security, 

Medicare, Medicaid, interest on the national debt? 

Now, am I correct, Dr. Holtz-Eakin, that the Bush administration actually wants to increase defense spending, Medicare, and is 

increasing interest on the debt, and three—even from this budgethawkish administration, three of the five largest programs in the 

entire Federal budget that make up the vast majority of Federal 

26

spending, this administration is asking we spend more and not 

less? Is that correct, Dr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. We have not yet seen the President’s budget, 

and we will be back to discuss it. We will be happy to. 

Mr. EDWARDS. Let me say for fiscal year ’03 the administration, 

while talking about being tough on spending, actually requested increases in three of the five largest Federal programs—and, frankly, 

I supported them in some of those increases—but let’s do away 

with the myth that spending alone is going to keep our grandchildren from being drowned in a $7-trillion sea of national debt. 

Thank you, Mr. Chairman. 

Chairman NUSSLE. Mr. Garrett. 

Mr. GARRETT. Thank you, Mr. Chairman. 

You know, it is encouraging to sit on this side of the aisle and 

find out that we do have some commonality on some of the issues 

that we are discussing here, that, just as we would see that a tax 

increase is a burden on the individual, so, too, that an increase in 

borrowing today is a burden that is going to be placed maybe not 

on people today but on future generations. 

I do recall, Mr. Chairman, sitting here a year ago and heard your 

statement as you reiterated today at the outset of this meeting that 

deficits do matter. I appreciated your comment, back then, as a 

freshman member of this committee, to stress the importance of us 

to address the issue; and I think we need to continue that as well. 

To the gentleman from New England, I hear the same things to 

some extent back in my district in New Jersey as well when we 

hear, gee, we do hear some good economic news. But we have certain pockets in certain areas where people are not exactly where 

they want to be economically, for one reason or another. But I will 

tell you this, that I concur with the comments of Mr. Wicker, that, 

overall—and I say this each time I go out to a town hall meeting—

that, overall, the economic indicators are certainly positive and encouraging economic indicators, whether you are talking about the 

manufacturing numbers, up to the best numbers in 20-odd years; 

housing starts, best and largest in 20-odd years. 

Maybe that is one of the conundrums that we have in New Jersey, that, on the one hand, the economic numbers are so good, that 

housing starts are so great. But, on the other hand, I go back to 

my constituents and they talk to me that, if they are so great, we 

have suburban sprawl. The housing is so great that they are building too many houses and that we actually have an environmental 

issue that things are going so well back in our State that we have 

to address it. 

So what I hear from my constituents is we do have certain areas 

we have to address economically, but, in the long term, things are 

improving and that what they do not want to have is an additional 

burden on them in the future, which would be a deficit today, nor 

do they want an additional burden on them today, which would be 

increases in taxes, which would be the result of us not continuing 

the tax cuts that we passed in the years in the past. 

My questions to you, though, still sitting here somewhat as a 

freshman, I will say this: When I was here at the beginning of last 

year I was amazed at the projections and how accurate I thought 

they could all be 10 years down the road. Now I know I was a little 

27

naive in that. I read through your report, and I see that maybe we 

are not even that accurate 5 years down the road. 

I look in the details that you have, I think, in your report. Is it 

correct to assume that the numbers that we are looking at today 

in the short term are usually more optimistic as to where our deficit is going to be and in the long term that they are going to be 

more pessimistic? 

Mr. HOLTZ-EAKIN. Actually, in one of the appendices, we walk 

through in fairly great detail and show the historic range of uncertainty that surrounded budget projections. 

Certainly, the near-term ones are more accurate than the longerterm ones. The more time you have in the future, the more likely 

you are to not anticipate things; and not just for the CBO but for 

economists in general, at the turning points, the same would be 

true. We have not experienced a large number of business cycles 

that would allow us to get projections around turning points as 

well as I would like, but that is a weakness that we will face now. 

I would also point out that in this particular business cycle, one 

of the things that the CBO as well as the economic profession has 

really worked to try to understand is the labor market and how it 

hasn’t quite picked up, its inconsistency with the pace of overall 

economic activity. We can talk about that more if you want to, but 

it does show up in the budgets, because the incomes haven’t picked 

up as much as the production and output have. There is a little bit 

of a mismatch at the moment, and that affects the budget as well. 

Mr. GARRETT. Is it better to err on reigning in spending today 

than to continue on either the flat line or a slight increase in budget expenditures? 

Mr. HOLTZ-EAKIN. We do not have a particular bias that we attempt to introduce in the numbers; let me be clear about that. I 

think when you look at the appendix and look at the fan chart, it 

is out to 5 years, which is the horizon that we can analyze at all 

carefully. The central forecast is for deficits, and there is a very 

small likelihood that, just through the course of economic events, 

everything breaks to the upside. 

In an economic technical fashion, you end up in surplus. The 

chances of that are much thinner than the chances of being further 

south. 

Mr. GARRETT. Thank you. 

Chairman NUSSLE. Mr. Baird. 

Mr. BAIRD. Thank you, Mr. Chairman. 

We have about 8 percent unemployment in our district, so when 

my good friends talk about the economy getting better I just came 

from a lot of unemployed workers who sure do not feel it is getting 

better, and when Mr. Bonner talks about taxing people who are 

looking for work, I think that is disingenuous. 

Those folks who are looking for work are not paying income tax, 

and when we have the opportunity to help them by extending unemployment benefits we do not do so, and when we have the opportunity to help them by extending the child tax credits to help their 

children, this Congress refused to do so. 

We spoke some time back in this Congress—most of us ran for 

Congress on a premise of a thing called the lockbox, and I asked 

the distinguished gentleman last year: How much will we be borVerDate 0ct 09 2002 16:23 Mar 29, 2004 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 X:\HEARINGS\108TH\108-15\HBU027.000 RYAN PsN: RYAN
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rowing from Social Security over the next 10 years in your estimates from the trust fund? 

Mr. HOLTZ-EAKIN. In the CBO projections, we have a on-budget deficit of $4.3 trillion over the 10 years and an off-budget surplus 

of $2.4 trillion over the 10 years. 

Mr. BAIRD. So if I were to tell the average citizen how much we 

have taken out of the lockbox that we promised to lock up, what 

figure would I give them? 

Mr. HOLTZ-EAKIN. With the stipulation that I do not believe we 

actually have a budgetary lockbox, the accounting is such that, instead of $4.3 [trillion], we have $1.9 trillion, and the difference is 

the 2.4. 

Mr. BAIRD. So we all ran for office saying we would not touch the 

Social Security Trust Fund, we would put it in a lockbox, but yet 

we are borrowing about $2.4 trillion from that lockbox over the 10 

years so that we can make this budget deficit look smaller. 

Do we have a viable plan to pay back what we borrowed from 

the Social Security Trust Fund? 

Mr. HOLTZ-EAKIN. There are budgetary plans, and then there is 

the future path. The future path is that all budgetary responsibilities, all outlays, come from the economy in the end, and the Social 

Security Trust Fund does not contain any real economic resources. 

It is an intragovernmental accounting device that keeps track of 

particular transfers from the Treasury general fund to the Social 

Security Administration and vice versa. So in the end, the obligations that are out there for Social Security and other entitlements 

will be paid for out of the economy, and those resources will come 

into the government by taxes or borrowing, and they will go out in 

the form of benefit payments. 

Mr. BAIRD. When people talk about lowering the deficit by half 

in the next 5 years, my reading is that we are going to lower the 

deficit but we are not going to count the borrowing from Social Security and Medicare. If we actually did count that in any feasible 

way, would we actually see the deficit reduce by half? 

Mr. HOLTZ-EAKIN. Again, I do not know what people have in 

mind when this target gets tossed around. I have heard dollar values. I have heard as a fraction of GDP. 

You would like, it sounds like, to count it in strictly the on-budget portion. Again, the baseline projections show the deficit going 

from 4.2 percent of GDP to 2 percent of GDP in 2 years. So as a 

fraction of GDP on a unified basis, that is in the baseline projection. That is a particular policy. You could choose another policy 

which counted it using only the on-budget portion; and again for 

dollar values—it would be without taking advantage of the GDP 

growth, it would be a different policy. 

Mr. BAIRD. I appreciate that. 

I just find it a little ironic that we run for office on one policy 

and then we defend our actual actions based on a different policy. 

One of the things that always puzzles me is the tendency for correlation causation reasoning, and it goes something like this: There 

were tax cuts passed, the economy got better, ergo it got better because of the tax cuts. 

Seems to me lower interest rates have something to do with that, 

and neither I nor my friends on the other side of the aisle are reVerDate 0ct 09 2002 16:23 Mar 29, 2004 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 X:\HEARINGS\108TH\108-15\HBU027.000 RYAN PsN: RYAN
29

sponsible for that, but I can tell you a lot of folks invested in their 

business. 

Have you attempted to look at what percentage of the economic 

recovery and the resulting reduction in deficit has been the result 

of lower interest rates versus tax cuts? 

Mr. HOLTZ-EAKIN. No, we have not done a decomposition of all 

the potential factors that led to recovery from the recession. 

I think as a matter of trying to relive an alternative history, you 

are exactly right. The path of monetary policy and the path of fiscal 

policy are intertwined; and if one had chosen another path, one 

would have gotten a different answer. 

Mr. BAIRD. I raise that because, as we look toward the possibility 

of extending the tax cuts, one might want to decide whether or not 

we deserve crediting those tax cuts with a recovery and recovery 

of jobs productivity, et cetera, or whether lower interest rates may 

be more responsible. If deficits drive those interest rates up, we 

could have an unpleasant surprise. 

I thank the gentleman for his commentary. 

Chairman NUSSLE. Ms. Brown-Waite. 

Ms. BROWN-WAITE. I have a couple of questions, they are not related but totally disjointed, but they are questions that I have as 

a result of listening to some of the other testimony. 

As a freshman, I need to ask this question: Is borrowing from Social Security, the Social Security Trust Fund, new? I mean, was it 

done long before these projections whenever there was a deficit? 

Mr. HOLTZ-EAKIN. Certainly there is no economic division between the Social Security deficit and the on-budget deficit, and so 

to the extent that we have run unified surpluses smaller than the 

Social Security surplus, the same kind of math applies. 

Ms. BROWN-WAITE. OK. And following up on Congressman Wicker’s point, if we were to increase taxes, would we not risk it having 

a negative effect on the economy, especially in light of the fact that 

things do seem to be economically turning around? 

Mr. HOLTZ-EAKIN. Again, in the absence of a particular proposal—it depends if you mean right now, if you mean in 2011, and 

what else you might do with that. When we did, for example, our 

analysis of the President’s budget last year, I tried to take pains 

to explain that you cannot look at one piece of the fiscal policy in 

isolation. Indeed, the entire budget has consequences for the economy. So specifying the whole policy is actually the key, and if the 

policy involves tax cuts or tax increases, there has to be some other 

part to it. You have to figure out what would be done with those 

revenues—would they be spent? Would they be used to retire debt? 

And that package has to be analyzed. You cannot look at one piece 

in isolation. 

Ms. BROWN-WAITE. OK, but if we look at the tax breaks that 

went to businesses, particularly small- and moderate-sized businesses, particularly the accelerated depreciation, would not that 

have somewhat of a stagnating effect on the economy? 

Mr. HOLTZ-EAKIN. The question is magnitudes. 

In our baseline, we anticipate that the partial expensing goes 

away at the end of 2004. That provides a tax base incentive for 

firms to move their investment expenditures from 2005–14. We expect they would take advantage of that, and we have an increase 

30

in our business fixed investment in 2004 from that fact alone. But 

that is by no means the only reason that we expect an investment 

recovery: The return of the stock market to higher levels, increased 

profitability, some increase in foreign demand because of the 

growth in the international economy. So it is true that the expiration of partial expensing is there, but it is not the only part of the 

decision-making, and, in this case, I would think that the timing 

issue is far the most important one in terms of the economy. 

Ms. BROWN-WAITE. OK. The last question that I have, I come 

from an area of west central Florida with a very high percentage 

of veterans; and, obviously, the veterans’ budget has mandatory 

spending. I just would like to know what kind of projections that 

your baseline assumes about veterans spending, both discretionary 

and mandatory. 

Mr. HOLTZ-EAKIN. Well, for the discretionary, the baseline projections would follow the usual rules of inflating at the appropriate 

price index, the discretionary appropriations that we have in 2004, 

the omnibus. 

For the mandatory programs, I confess that I am not intimately 

familiar with the details, but we can easily show those numbers to 

you. 

Mr. WICKER. I wonder if the gentlelady would yield in her final 

minute? 

Ms. BROWN-WAITE. Yes. 

Mr. WICKER. In terms of assuming that tax cuts will be extended 

beyond their repeal or deadline, I assume that your office is required to assume that the law will be followed and does not take 

into account the fact that many of the repealers were placed in 

there simply for parliamentary reasons, to comply with the budget 

rules, particularly in the U.S. Senate, that did not allow us to have 

the tax cuts be permanent as we intended. 

Are you able to take into consideration at all the fact that almost 

all of the debate surrounding these tax cuts has assumed that they 

would be permanent? 

Mr. HOLTZ-EAKIN. I will repeat something I said earlier. I will 

try to say it more clearly. As a budgetary matter, we assume current law, and in figuring out receipts, we assume that tax cut sunset when we do our calculation. 

In doing our economic projection, we are forced to forecast the behavior of the private economy, and people will behave based on 

what they believe will be the tax law. It could be made permanent, 

and the private sector could believe it will sunset, or the private 

sector could believe on a provision-by-provision basis that some 

things stay, some things go. 

We do not know exactly what those beliefs are. So into our baseline, we assume that the private sector believes that the tax cuts 

will sunset as written in law and our economic forecast and medium-term projections are consistent with that. So, in particular, 

when the tax cut sunset in 2011 and there are higher marginal tax 

rates, that will have incentives for labor supply and other economic 

incentives. We did show a modest negative impact on GDP as a result of that sunset, and so we have taken it into account in doing 

our baseline projections. 

Mr. WICKER. Thank you very much. 

31

Chairman NUSSLE. Mr. Emanuel. 

Mr. EMANUEL. Thank you, Mr. Chairman. I look at this record of $477 billion and I think it underscores the 

point that it is almost impossible to finance three wars with three 

tax cuts. I am reminded of the Vice President’s comment in the recent book that is out that deficits do not matter, and I think the 

$477 billion almost underscores that point. 

Now I actually believe, and I have had discussions with friends 

on both sides of the aisle, a growing economy should reduce the 

deficit. I am struck by all those who claim that the economy is 

growing at record pace and yet we have a record deficit when, in 

fact, the net result should be of a growing economy, should be of 

reducing deficit, not one that is growing. 

Last year we had a record number and now this year we surpass 

last year’s number, so I am struck both by what should happen is 

not happening. 

I understand you are not willing to enter into some policy disputes and get yourself caught in the crossfire, but I do understand 

that, as I read your report, that you seem to think deficits are manageable. But yet when I read the IMF’s report about the danger of 

the U.S. deficit to the economy, the two different tones, tenors, and 

also conclusions, one is we believe our deficit is not a problem to 

either our economy or the world’s economy and their conclusion in 

the IMF, that, in fact, the biggest danger to the American economy 

today is the American deficit and the permanence of it. If you look 

at the size of the deficit and the way the economy is growing, we 

are going from a cyclical to a structural deficit, and once that attitude changes, as Mr. Baird noted, my colleague, interest rates are 

going to spike. Everything we have been whistling by, you know, 

will catch up with us. 

So I do think that deficits matter, having the right foundation 

matters, having tax cuts matter, but not all tax cuts lead to the 

same economic benefit. Some are stronger, and some are weaker. 

Not all spending leads to the same economic growth. Investments 

in education, health care, and the environment lead to greater 

long-term growth than other types of spending. 

So as I read your report and try to look forward both to the cause 

of the deficit as well as to future types of spending and you talk 

about Medicare and some of the other entitlements, I was surprised. I am asking for a clarification. 

You wrote a letter last week to Senator Frist about the ability 

of the Secretary of HHS to negotiate prices. In front of this committee, our chairman had a hearing on waste, fraud, and abuse. 

The Inspector General from HHS was sitting there and said, under 

their study of 10 drug costs, between veterans and HHS, veterans, 

because they negotiate close to $2 billion, $1.8 [billion] to be exact, 

in their study and if HHS had that same right on 10 drugs they 

could save money, and yet you wrote a letter saying you did not 

see that type of savings. 

Now either I misunderstood that letter and I took it out of context, and I apologize, but you see the growth in Medicare as a 

threat to the long-term economic fiscal structure of the government 

and yet not give the Secretary of HHS the ability to create a Sam’s 

Club and negotiate lower prices in the same way we give veterans 

32

the right to do that. Could you please explain why you wrote that 

letter and the basis behind that? 

Mr. HOLTZ-EAKIN. Certainly. The majority leader in the Senate 

asked for an understanding of the impact of this language; and in 

looking at the Medicare bill as passed by the Congress, signed by 

the President, we determined that for the prescription drug plans, 

the private sector delivery of the prescription drug benefit, the key 

of their ability to manage costs is to have both the incentives and 

the ability. Do you give those firms the tools and the incentives to 

manage costs? 

In the way the bill was passed, those are at risk for cost overruns. They have every incentive to control costs for the usual reasons and they indeed are given the tools to do that. So our reading 

of the law as written is that those private sector plans would have 

tremendous incentives to cut the best deal possible with pharmaceutical companies and that, as a result, removing the language, 

the noninterference language, would have a negligible influence on 

the cost of the bill because they would have done what you would 

have. I am not familiar with the Veterans Administration example, 

but it has already taken advantage of the best discount prices. 

Mr. EMANUEL. Let me share this with you. 

The Veterans Administration, since 1992, has the right to negotiate bulk prices, and under this committee in this hearing room 

they do far better than HHS on an analysis of 10 drugs used by 

seniors on savings. If we can trust the private sector—the last time 

I remember we have a responsibility to the taxpayers—we can also 

trust the Secretary of HHS. 

I have trust in Tommy Thompson. I do not think he is inadequate or incompetent. I think he can somehow put together 41 

million seniors and get a good deal. I think he is a good negotiator. 

I have seen him do it as a governor, and I will send you what the 

Veterans Administration does. 

I see your economic incentive that you think the private sector 

has. My own view is all of us, Democrats and Republicans alike, 

as well as this administration, Tommy Thompson is fully capable 

of negotiating something because he has an incentive, too, and that 

is honoring the taxpayers who are going to be asked to foot $400 

billion. 

Chairman NUSSLE. Mr. Diaz-Balart. 

Mr. DIAZ-BALART. Thank you, Mr. Chairman. 

I am tempted to respond Mr. Moran’s comments on the reasons 

of the Iraq war, but I know this is not the appropriate forum, and 

it has been covered by the national press. So even though I am 

tempted, it is a new year, I will direct my attention to the director. 

There are a number of different ways that you can reduce the 

deficit. The government can take steps to reduce deficit. You know, 

we can increase revenues, we can increase taxes and hope that that 

will lower the deficit. We can try growing the economy, and there 

are different ways that we can do that. Tax cuts is one of the ways 

that this Congress and this President chose to do so, and many will 

argue it is working. 

We can also reduce spending, and from what I heard today, 

spending is one of the large segments of our problem. 

33

Would it be advisable—and I guess I am allowed to ask advice—

would it be advisable, then, to take steps to further reduce spending in order to try to reduce the deficit if in fact you believe as I 

do, that the deficit is something that does count, as our chairman 

continuously reminds us? 

Mr. HOLTZ-EAKIN. Well, I will say at the outset that it is not my 

portfolio to advise on particular policies. 

I do think the things that are in the report and that I would 

highlight show that to run large, sustained deficits going forward 

in the face of a fully employed economy is, among other things, easily economically detrimental. 

The second thing that we have discussed in this committee, as 

I testified last August, is that over the long term, government 

spending is a good indicator of the overall cost, and that once the 

decision is made to spend the monies in the Federal Government, 

the next decision is how to finance it. 

You can finance it with taxes, or you can finance it by borrowing, 

which is simply a decision to defer the taxes. And going forward, 

it is clear that there will be a vigorous policy debate on how to do 

that financing mix. But certainly over the long term, one of the 

messages of both I think this report and some other studies that 

we have done is that there are spending demands built into the 

government programs that will simply have to be debated and discussed in terms of how they are financed or whether they will be 

mitigated. 

Mr. DIAZ-BALART. And just a follow-up. So therefore an increase 

to that deficit of $900 billion would be, I would imagine, worrisome; 

in other words, if this Congress had gone ahead and accepted the 

amendments posed on the floor by our friends on the Democratic 

side, which would have increased the deficit by about $890 billion, 

$900 billion, despite all the rhetoric, that clearly would have created a major problem, would it have not? 

Mr. HOLTZ-EAKIN. There is no magic line between the correct 

amount of a deficit or a harmful or not harmful amount. 

The U.S. Federal budget averaged a deficit of 2 percent of GDP 

in the 1970s, it averaged 2 percent of GDP in the 1990s. Economic 

performance was clearly superior in the 1990s. And so there is no 

simple relationship between a level of the deficit and economic performance, in the same way there is not a magic line that separates 

a sustainable level of debt from one where investors lose confidence 

in your ability to service that debt. So I do not know whether the 

$900 billion hits the magic line. 

What we do know is that going forward, the economy does not 

need this sort of short-term support, and we are running a sustained large deficit that has a negative economic consequence. 

Mr. DIAZ-BALART. I understand that you do not know how to find 

out what that magic number is; but clearly, you know, close to 500 

is better than 500 plus 900. Is that an accurate statement? 

Mr. HOLTZ-EAKIN. We are getting the direction squared down. 

Mr. DIAZ-BALART. OK. So clearly I do not think, at least I am not 

comfortable with the deficit we have today and the ways we have 

to reduce it, and it seems to me that that plus another $900 [billion] would be irresponsible. I am not asking you to comment on 

34

that, but clearly it probably would not be good fiscal policy to add 

another $900 billion to that large deficit. 

Mr. HOLTZ-EAKIN. I think you have exhausted my views on what 

the consequences will be going forward. I think we are pretty clear. 

Mr. DIAZ-BALART. Thank you, Mr. Chairman. 

Chairman NUSSLE. Mr. Thompson. 

Mr. THOMPSON. Thank you. 

Your report states that about a third of our Federal debt is held 

by investors outside of this country, foreign investors. Can you tell 

us how much we pay in interest on that portion of the national 

debt that is held by foreign investors; in other words, how much 

money do we send out of this country to people living in other 

countries in regard to paying the interest on our national debt? 

Mr. HOLTZ-EAKIN. Our net interest in 2004 is $156 billion. Without a detailed knowledge of the composition or holdings, the cheap 

answer is to divide by 3, so it is on the order of $50 billion. We 

can get you a detailed estimate if you are interested. 

Mr. THOMPSON. Fifty billion dollars? Does that have any implications on our economy, the strength of our economy; say, for instance, in regard to interest rates? Could there be some complications here at home because of monetary fiscal policy of our countries that hold the vast amount of our debt? 

Mr. HOLTZ-EAKIN. From a strictly economic point of view, the net 

issuance of the debt and who buys it, picking out particular buyers, 

not matter very much. 

The question is, at what market price will they buy the debt? 

These particular governments have bought the debt at market 

prices, and we can see what they are. There is another layer on top 

of it that many people speculate about in terms of the broader political goals of a government in purchasing U.S. securities. That is 

a noneconomic thing. It has to do with their domestic agenda or 

their international relations. 

Mr. THOMPSON. So their domestic economic policy could have 

some spillover, as I think someone mentioned here; in something 

such as trade negotiations, could be a leverage point that we could 

feel? 

Mr. HOLTZ-EAKIN. Perhaps. I am not conversant enough to know 

what is going on there. 

Mr. THOMPSON. And I heard in response to numerous questions 

the fact that you are not interested in getting involved in giving 

us policy advice, but——

Mr. HOLTZ-EAKIN. There is actually a law that prohibits that. 

Mr. THOMPSON. So you say you are not interested in breaking the 

law. 

Mr. HOLTZ-EAKIN. It is something I did not——

Mr. THOMPSON. I do not know how to frame it to sort of keep you 

out of trouble, but there has been a lot of discussion about this effort to reduce our deficit, 50 percent reduction number. 

Would it seem plausible that reinstitution of some budget enforcement act language, such as PAYGO would be a good tool that 

we could rely on to get us there? 

Mr. HOLTZ-EAKIN. We actually have a quick review in part of the 

report on budgetary mechanisms, and at least my reading of the 

historical evidence, PAYGO discretionary caps were very useful in 

35

supporting the consensus when attempts have been made in the 

’80s and ’90s to reduce the deficit. 

However, in the absence of the consensus first to do that, such 

rules themselves will not bind the Congress. There are alternatives 

that can always be imposed on a year-to-year basis. And so the 

first step, I think, is to develop a consensus for the fiscal policy 

going forward, and then for the Congress to define rules to support 

that consensus. But I think the order is most effective if the it 

comes that way. Rules cannot come first. 

Mr. THOMPSON. There has been some talk today about reaching 

that goal. The President mentioned in the State of the Union 50 

percent reduction, I think in 5 years, and your data suggest that 

our deficit in 2004 is $477 [billion]. To reduce that by 50 percent 

in 5 years, our deficit would still be $240 billion in 2009. 

In the same speech, and I think it has been supported here by 

our friends across the aisle, the President has suggested that we 

make permanent the tax cuts. And again your data suggest that 

that would be $132 billion cost, including debt service in that figure. So that means that if you exclude the discretionary spending, 

the rate of inflation holds, we are still in 2009, a deficit of 310 billion; is that right? 

Mr. HOLTZ-EAKIN. The number for 2009 for the tax cuts, the 

$132 billion, would be the piece that we would have to make sure 

we got exactly right. The baseline has the deficit at $268 billion. 

That includes the expiration of the partial expensing and some of 

the dividend tax in 2008, so we can work on exact numbers, but 

certainly that is the kind of calculation we need to do. 

Mr. THOMPSON. So can we get to the 50 percent number if we 

reinstate the tax cuts or extend the tax cuts? And, if we would, 

what sort of policy changes would we be looking at? 

Mr. HOLTZ-EAKIN. We can certainly show you the net combination of making permanent some tax provisions and then whatever 

other policies you might need on the mandatory and discretionary 

side. Obviously there is an infinite number that will get you to 

$240 billion. 

Chairman NUSSLE. Mr. Portman. 

Mr. PORTMAN. Thank you, Mr. Chairman, and Mr. Holtz-Eakin, 

thank you for your good testimony again. Appreciate your latest report. 

We have had a lot of talk today about deficits. Deficits do matter, 

but there has been a lot of talk about these being record deficits. 

What is the critical measure of the deficit in terms of its impact 

on the economy? Is it the percentages of GDP or is it an absolute 

actual number? 

Mr. HOLTZ-EAKIN. I think it’s the percentage of GDP. You should 

always measure this relative to the size of the national income 

available to service it. 

Mr. PORTMAN. I do not know what the percentage of GDP is in 

your latest report. I know when I was first elected in 1992, when 

I first ran for office, the percentage of GDP was 4.7 percent, which 

is not as high as in the ’80s when it was over percent of GDP. 

What is your percentage of GDP that you are estimating? 

Mr. HOLTZ-EAKIN. For 2004 it is 4.2 percent. 

Mr. PORTMAN. It is 4.2 percent. So it is not a record level. 

36

In terms of the tax cuts, what do you think the impact of the tax 

cuts was in terms of business investment and lowering the cost of 

capital? What impact did they have on the economy over the last 

year? 

Mr. HOLTZ-EAKIN. We have not done a particular scientific decomposition by any means. The broad fiscal policy, I believe, supported the economy when private demand was weak, including the 

household sector as well as the business sector. 

Mr. PORTMAN. And recent industrial production rose at 6 percent 

this year, the fastest in over 31⁄2 years, certainly is attributable to 

lowering the cost of capital, I would say. And so my friends on the 

other side of the aisle say, ‘‘Gee, how can you make these comparisons and was not it just lower interest rates?’’

We talked about adding value to the market. It has gone up 

about 25 percent over the last year, which helps everybody invested 

in the 401(k), the IRA, and helps the economy, so I do not think 

there is any question there is a cause and effect here. 

In terms of interest rates, interest rates were high during the recession, is that why we had a recession, because of interest rates? 

Mr. HOLTZ-EAKIN. No. I think the Fed moved fairly aggressively 

to lower short-term rates. We have seen the rates down as well. 

Mr. PORTMAN. Rates have been down over the last few years, so 

it helps. But I just think we have to give credit where credit is due, 

and when you look at what happened over the last few years, looking at these charts coming up here, was it spending, was it the tax 

cuts, was it the economy? 

If you believe that it was tax cuts, then you better look at this 

chart, because even if you think tax cuts did not help, which I argued they did, the tax cuts would be roughly 20 percent—when you 

add all the tax cuts—of the reason for us going into a deficit position. About 30 percent as I read these charts is reduced spending, 

so it is bigger than tax cuts, and the biggest cause is the economy. 

So the one piece of that that is getting the economy moving is 

the tax relief, particularly I would say on the business investment 

side, which includes the cost of more tax relief, because that goes 

to small businesses, largely those who have subchapter S companies and sole proprietors and partnerships. 

I just think we have to look at the analysis carefully and not say, 

‘‘Gee, tax cuts did not help.’’ And we have to admit that the goal 

here is to get the economy moving. That is how we got the surplus 

this time. That is how we will do it again. And I appreciate again 

some of the testimony you have given as to the impact of the tax 

cuts. 

Finally, with regard to your analysis, the $87 billion for Iraq 

would have been continued through the 10-year period. Why do you 

assume that, that there would be an $87 billion supplemental for 

Iraq? Is that based on some policy from the administration? 

Mr. HOLTZ-EAKIN. The baseline rules as outlined in the Budget 

Act can’t ask the CBO to prepare a baseline projection that includes all appropriations, in this case from the end of 2004, and to 

extend them for the entire projection period, so it is consistent with 

the——

Mr. PORTMAN. Under the rules you have to add the $87 billion 

supplemental, even though the administration has indicated the 

37

opposite, that they don’t expect to have another supplemental, the 

$87 billion this year, and certainly hope not to have it over the 10-

year period. And that adds, what, about $1 trillion? 

Mr. HOLTZ-EAKIN. About $1.1 [trillion], including debt service. 

Mr. PORTMAN. I appreciate that clarification, and again, I appreciate your coming to the committee again and giving us some hardnumber analysis. The key is clear to me. It is keeping spending 

under control, and the President, I understand, is going to submit 

an austere budget on nondefense, nonhomeland domestic spending, 

which is a real problem around here. 

I hope the Democrats come up with a budget this year. I look forward to seeing it. I am sure there will be a responsible debate because we will have two budgets to talk about. When you add up 

all the amendments from last year, I think we had about $900 billion of additional spending. Taking Mr. Edwards 4 percent number 

into that, which is about $36 billion, not $32 billion, so it is more 

than even the additional spending due to the interest on the debt 

over the next 10 years. 

So the key to me is keeping the spending under control and letting the economy grow; and if we do that, we will get not just half 

the deficit reduced, but even more over the 5-year period. 

Chairman NUSSLE. Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. Mr. Holtz-Eakin, we have 

heard a lot about this budget. The fact is we passed massive tax 

cuts in 2001 and 2003, and the economy has been in the tank ever 

since. Cause, effect, I don’t know. That is what happened. We 

passed the tax cuts. That is what happened. The fact of the matter 

is it makes a difference as to which taxes you cut, whether you had 

used the money for other stimulus, but the $100 billion, you could 

hire 3 million people at $30,000 a piece, and we would have hundreds of billions of dollars. 

And you mentioned swings of $500 [billion], $600 billion in terms 

of the deficit. We have heard the economy in terms of jobs listed 

as good. I think that the fact is it is going to be the worst job-producing record since the Great Depression. The stock market is 

doing great, yeah, I mean, its average over the last 30, 40,50 years 

is about 8, 9, 10 percent a year. It is exactly where it was 3 years 

ago. It should be up 8, 9 percent compounded a year, but it is exactly where it was 3 years ago, and that is great. 

Let me ask you a couple of questions on policy. You indicated the 

budget might be balanced in 8–10 years, but I understand that 

whatever you call the—making the tax cuts permanent, the balancing of the budget would require that we reject making the tax 

cuts permanent. Is that right? 

Mr. HOLTZ-EAKIN. The projection that we show shows the budget 

coming to balance and a modest surplus———

Mr. SCOTT. If we reject the permanent tax cuts? 

Mr. HOLTZ-EAKIN. Under current law. 

Mr. SCOTT. Does it have any room for going to Mars? 

Mr. HOLTZ-EAKIN. This does not include any new policies. 

Mr. SCOTT. Does it include any policy of privatizing Social Security and the trillion dollars that that is going to cost? 

Mr. HOLTZ-EAKIN. It is a projection of current law. 

38

Mr. SCOTT. So if we make the tax cuts permanent, go to Mars 

and try to privatize Social Security, we are back in the ditch; is 

that right? 

Mr. HOLTZ-EAKIN. We haven’t analyzed that. We can look at it. 

Mr. SCOTT. What portion of the Federal budget was paid for with 

borrowed money at the beginning of this administration? 

Mr. HOLTZ-EAKIN. The historical deficit? I don’t remember the 

number off the top of my head, but we have seen it swing from surplus of about 21⁄2 percent of——

Mr. SCOTT. We weren’t borrowing any money. So zero. 

Now, what portion of the Federal budget right now are we spending—are we paying for with borrowed money? 

Mr. HOLTZ-EAKIN. It is $477 billion out of total outlays on the 

order of $2.3 trillion. 

Mr. SCOTT. On budget, not Social Security, because that is supposed to be paying for itself? About 371⁄2 percent of the Federal onbudget spending paid for with borrowed money? 

Mr. HOLTZ-EAKIN. Typically, it is defined as going to private 

credit markets and raising funds, and that doesn’t include the Social Security part, which is just an intergovernmental transfer. So 

it would be the $477 billion, which is how much is actually borrowed. 

Mr. SCOTT. Plus taking the spending in Social Security surplus 

that was in a lock box when this administration came in. 

What was the net interest that we are going to be paying in 

2014? Net interest, you have at $338 billion? 

Mr. HOLTZ-EAKIN. Yes. 

Mr. SCOTT. Social Security surplus, $284 billion. 

Now, in 2017, the net interest will be a little more than $337 

[billion]. Is that a fair assumption? 

Mr. HOLTZ-EAKIN. On this—based on the projection——

Mr. SCOTT. About the same, a little more? 

Mr. HOLTZ-EAKIN. Well, under the baseline, we have gone back 

to surplus, so the debt to outstanding will be diminishing, and interest rates are stable in the long-run. So it will start to go down. 

Mr. SCOTT. About $300 billion? Would it go down $30 billion? 

What is the Social Security surplus in 2017? 

Mr. HOLTZ-EAKIN. I don’t know that number. 

Mr. SCOTT. Isn’t it zero? 

Mr. HOLTZ-EAKIN. I don’t know. 

Mr. SCOTT. Doesn’t it go to zero in 2017? 

Mr. HOLTZ-EAKIN. I have to check. 

Mr. SCOTT. Have you heard the joke about the guy falling down 

a 20-story building and passing the eighth floor? It says so far no 

problem. You have net interest of $300-some billion offset by $200-

some billion in Social Security surplus. The Social Security is going 

to go down to zero in 2017, putting a hole in the budget of almost 

$300 billion. 

Is there anything in this budget proposal—I will just ask it another—is that a problem? I mean, we have all these happy faces 

on the budget. It is nice. Do we have a problem? 

Mr. HOLTZ-EAKIN. I think that to pull any particular piece, Social 

Security or Medicare Part A or any subpart of the Federal budget 

39

out is not revealing. I think that the important thing from the perspective of long——

Mr. SCOTT. A $300 billion hole in the budget does not constitute 

a problem? 

Mr. HOLTZ-EAKIN. I think that without knowing how the rest of 

the budget will play out, it is impossible to say. The long-run problem from the perspective of the entitlements is that they are structured in a way that regardless of how they are financed, they will 

demand ever-increasing fractions of our national income under current law, and that is, I think, the fundamental issue that is important. 

Mr. SCOTT. A $300 billion budget in 3 years, a swing in a budget 

is not a problem. Is that your position? 

Mr. HOLTZ-EAKIN. In the absence of knowing what the rest of the 

budget does, it is impossible to answer. 

Chairman NUSSLE. Ms. DeLauro. 

Ms. DELAURO. Thank you, Mr. Chairman, and my apologies. I 

was chairing a food safety hearing, and so I am sorry I missed most 

of the testimony—or all of the testimony. So I guess I have a twopart question. 

What percentage of the GDP was a deficit in the Clinton years? 

Mr. HOLTZ-EAKIN. Depending on the year chosen, it was different. First there were deficits and then surpluses in the 1990s. 

Ms. DELAURO. Looks to me like it was pretty much zero if I look 

at the chart that you have listed here. 

And does the Bush administration have a plan to get us back 

into surplus? 

Mr. HOLTZ-EAKIN. I am not privy with the administration’s 

plans. 

Ms. DELAURO. So you know of no plan that the administration 

has to get us back into a surplus position? So in the Clinton years 

it was a zero percentage of—the deficit was a zero percentage of 

GDP, and we have no plan now to get us back into the surplus. 

A lot of discussion on cutting spending in order to reduce the deficit. If you take a look at nonhomeland security, which my colleague, Mr. Portman, mentioned, that discretionary spending has 

been virtually frozen for the past 3 years. If the President proposed 

only a minimal increase of .9 percent, he would only save about 

$4.8 billion. Do you think that this is the most effective way to address our projected deficit of $362 billion in 2005? 

Mr. HOLTZ-EAKIN. Which ever package the Congress and the administration choose, no matter their policy preferences, I can tell 

you the cost. The programs are chosen for their benefits. The budget reflects the costs, and my goal here today is to illuminate those 

costs as clearly as possible. 

Ms. DELAURO. Without using the Social Security surplus, the 

deficit will be $631 billion. Is it credible to think that we can control the deficit simply by looking at this small part of the budget? 

And which you do have some views, I would think, as to where you 

might look to address these issues. 

Isn’t it true that we could completely eliminate domestic appropriations that aren’t related to homeland security and still be left 

with a deficit? 

40

Mr. HOLTZ-EAKIN. Certainly the budget authority for particular subset of the budget was $341 billion in fiscal year 2004. That is 

our projection, and that is smaller than the deficit we project. 

Ms. DELAURO. Where would you continue to look for opportunities to lower the deficit? 

Mr. HOLTZ-EAKIN. I would say this is Casablanca. You can round 

up the usual suspects, you can look at the rest of spending, and 

you can look at the remainder of the receipts. 

Ms. DELAURO. Well, it is not exactly like Casablanca. Maybe 

some of us will get up and sing the Marseillaise. But it is not. This 

is a reality, and you make commentary on how you might be able 

to handle these significant deficits. And, you know, where do you 

look for your biggest bang for the buck here, if you will, to try to 

deal with your cost—be able to bring your budget into some sort 

of either balance or surplus? 

Mr. HOLTZ-EAKIN. I hope it has been clear from the outset that 

my goal is to inform the committee about the current track of the 

Federal budget. Left under current law, that is the neutral baseline 

provided by the projections. And to show the budgetary implications of some broad alternatives, we sketched those in our report 

because they are commonly discussed. And indeed, we could analyze further specific proposals. I do not believe—I hope it is not interpreted that I am providing commentary on the best way to proceed in fiscal policy. That is not my role here today. 

Ms. DELAURO. It may not be your role here today, but you certainly might have some thoughts that you impart maybe confidentially here to members or to the chairman or ranking member or 

to the administration about what they might do or maybe the view 

is just a hands-off view of this is it and come what may. 

Mr. HOLTZ-EAKIN. The CBO works with the Congress. If you 

would like to have a discussion about particular ideas that you 

might have, I would be happy to pursue that. 

Ms. DELAURO. I am happy to do it. Thank you. 

Chairman NUSSLE. Mr. Shays. 

Mr. SHAYS. Thank you very much for your testimony here. I 

think it is fair to say that neither Republicans or Democrats feel 

necessarily that you have sided with their position. You have provided information, and that information is not too pleasant. 

A lot of people don’t like deficits on either side of the tables here, 

but I didn’t hear hardly any solutions. I heard that we have deficits, and I heard that some wanted to blame the economy, some 

wanted to blame tax cuts, some wanted to blame spending, and we 

all have our view. I happen to think it is spending. And others 

think it may be the tax cuts. But ironically if they think it is the 

tax cuts, they don’t want to raise taxes and put them back to where 

they were. So they certainly don’t have a solution there. 

I just remember when I was on the committee during the early 

years, the Bush years and the Clinton years, when President Clinton got elected, he didn’t have a plan to balance the budget either. 

It was never in balance under his plan. Republicans were elected 

in 1994, took office in 1995, and we had some major debates. And 

what we did ironically is we cut taxes and we froze spending, and 

ultimately we balanced the budget. 

Ms. DELAURO. Would the gentleman yield? 

41

Mr. SHAYS. No, I won’t. 

Ms. DELAURO. Thank you. 

Mr. SHAYS. No. I have been here all day. I have been listening 

to everybody else, and now it is my turn to talk. And what happened was that we ultimately balance this budget by freezing 

spending over a number of years or at least slowing the growth in 

spending. We don’t seem to have the appetite to do that frankly on 

either side of the aisle, because when we voted out a budget last 

year and sent it to the floor, we couldn’t get any Democrats to support it, and we couldn’t get enough Republicans to support it. So 

we raised spending. And the reality was that we couldn’t get out 

of town unless we had President Clinton signing the budgets, and 

it always was we had to spend more. 

So I don’t know ultimately if we are going to find a solution here, 

because I know Republicans are going to be the ones that have to 

vote this budget out and we are going to get no help on the other 

side of the aisle. What I would like to know, though, is I would like 

to know what the impact of these extraordinary productivity 

growth gains have been. It strikes me a few things. The economy 

grows at 3 percent, and we still aren’t seeing the kind of employment that we want to see, but it also strikes me that if we get 

large productivity growths, that we are likely not to see interest 

rates go up all that significantly, because we continue to do a lot 

more with not as many resources and not as many people. Tell me 

the significance, please, of productivity growth, the pluses and the 

minuses. 

Mr. HOLTZ-EAKIN. I think the way you characterize it is exactly 

right and the way that we handled it in our baseline. Now, certainly we have seen extraordinary productivity growth measured 

over the recent recession and recovery, with some caveats that 

often, especially in the recent data, productivity gains are revised 

in the data and that coming out of recessions, the economy is capable of displaying a couple of quarters of very big productivity 

growth that aren’t permanent. 

But we have seen a period that is really quite remarkable. As a 

result, what we have done in the projection that is before you is 

raised the economy’s capacity to produce, and that has given us 

more room to grow and grow rapidly without placing upward pressure on prices, which would ultimately translate—higher inflation 

will translate into higher interest rates. 

So the rapid cyclical recovery that you see in our projection—at 

4.8 percent and 4.2 percent, and continued low inflation—is in part 

a reflection of that productivity growth. 

What we have not done is dramatically change our estimate of 

the long-run rate of labor productivity. It is still about 2 percent 

a year in our projection. To the extent that one were to develop a 

sufficient comfort that this was a persistent faster rate of productivity growth, it would be appropriate to raise that. That would 

mean that that extra room would get bigger every year. In our projections, we have revised the economy’s capcity to produce in a onetime fashion that is there for all 10 years but we haven’t caused 

it to expand. That would provide further room for the economy to 

grow with less inflationary pressure, and as a result, less nominal 

interest rate pressure as well. 

42

Mr. SHAYS. Does productivity growth provide ultimately greater 

wealth for individuals? How does it impact wealth? 

Mr. HOLTZ-EAKIN. Productivity growth, in the long-run, improves 

the Nation’s standards of living. You get more national output for 

every unit of labor input, for every person in simple terms. It typically, over the long-run, translates into higher real wages for workers, and the degree to which those higher national incomes are 

saved and invested leads to higher national wealth as well. 

Mr. SHAYS. Thank you. 

Chairman NUSSLE. Thank you. 

Are there other members, other questions that—just before we go 

into a second round, let me just make it clear that the witness has 

been before Congress for 7 hours today. It is going to be questions. 

If you want to make a comment, the microphones will be available, 

I am sure, for the media to do that, but if you have a question for 

the witness as we proceed, I am happy to entertain a very brief, 

quick question from those who would like to inquire. 

Are there members wish to do that? Mr. Edwards. 

Mr. EDWARDS. Thank you, Mr. Chairman. I don’t know of anything else we are going to do the next 2 hours that would be more 

important than looking at the largest deficit in American history, 

and my question is——

Chairman NUSSLE. Do you have a question for the witness? 

Mr. EDWARDS. Yes, I do. I keep hearing that, you know, let’s protect the tax cuts. Those that pushed them in 2001 would have admitted that wasn’t a $1.3 trillion tax cut if you extend it. Do you 

know if you assume that you extended all the temporary tax cuts, 

they were part of the $1.3 trillion tax cut in 2001, would have been 

more like a $2 [trillion], $3 trillion tax cut, Dr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. I forget the number, to be honest. We could 

go back and check. 

Mr. EDWARDS. And let me ask you this. I hear a lot about let’s 

balance this budget by cutting spending. I want to go back to the 

fiscal year 2003 budget and look at the five largest programs in the 

Federal budget that represent 70 cents of every single dollar we 

spend. Now, in the administration budget request for 2003, was defense spending—was the request to increase it or decrease it? 

Mr. HOLTZ-EAKIN. I recall it was an increase. 

Mr. EDWARDS. So it was an increase, significant one, I believe. 

Social Security, was there any request to reduce spending on Social Security? 

Mr. HOLTZ-EAKIN. I don’t remember any proposals for Social Security at all. It is current law. 

Mr. EDWARDS. If we privatize it as proposed, there would be a 

trillion dollar hole there. That would be an increase in Medicare—

the recent Medicare prescription drug bill, did that increase or decrease out-year expenditures for Medicare? 

Mr. HOLTZ-EAKIN. The President’s proposal, when we analyzed 

it, was simply an allotment of $400 billion over 10 years. 

Mr. EDWARDS. So it increased the Medicare budget, third of the 

five largest expenditures of the Federal Government. The administration asked for an increase there. 

Medicaid, did the administration in fiscal year 2003 ask for a reduction in Medicaid spending in 2003? 

43

Mr. HOLTZ-EAKIN. The President’s budget had a proposal in Medicaid, the details of which I forget. It involved changing the program somewhat in the out-years and I forget the net budgetary 

consequences. 

Mr. EDWARDS. To your knowledge for the 2003 budget year, the 

administration did not ask for a decrease in the Medicaid expenditures? 

The final one, the interest on the national debt, the administration didn’t have a choice. It had to ask for a massive increase in 

spending. So actually, as we look at spending reductions, the administration actually asked for increases in three of the five largest 

programs that represent 70 percent of the budget. 

One final point and in terms of a question. When we borrow 

money—now, this $477 billion deficit we are going to add as a debt 

to our children’s future this year, that does not include the money 

we are borrowing, the billions we are borrowing, from Social Security and Medicare. 

Now, do we have as a Nation a legal obligation to repay that 

money borrowed from the Social Security and Medicare Trust 

Funds? Is that a legal debt? 

Mr. HOLTZ-EAKIN. I am not a lawyer, but my understanding is 

that the legal implications of the trust fund balance are that benefits cannot be paid unless there are funds in the trust fund. So it 

has a triggering mechanism for the benefit payment. 

Mr. EDWARDS. So bottom line, that is a legal debt we are incurring. So it is just as real as the $477 billion deficit we are going 

to have this year. If you add the Social Security and Medicare 

Trust Fund borrowings for fiscal year 2004 to the $477 billion deficit you project we will have, what would that deficit be? 

Mr. HOLTZ-EAKIN. Well, if one took comprehensively all of the 

off-budget and trust fund-like activities, then you would have the 

$630-odd billion number that was referred to earlier. 

Mr. EDWARDS. So it would be $631 billion deficit that we are, in 

effect, adding to the national debt for fiscal year 2004 if you count 

the money we are borrowing from Social Security and Medicare; is 

that correct? 

Mr. HOLTZ-EAKIN. And, again, you can do the accounting for informational purposes any way you like, but from the strict point of 

demands on credit markets, the 477 represents the net demand on 

credit markets. The remainder is an intergovernmental transfer, 

which may have programmatic implications, and I understand that. 

Mr. EDWARDS. One last question about the chart. You often said 

40 percent of the deficit this year can be chalked up to economic 

changes from assumptions that were made. A lot of us said several 

years ago those assumptions were never honest. But the fact—

based on your knowledge of American history’s economy, would it 

be honest to say and project as a professional economist that you 

don’t expect America to ever again have a recession? 

Mr. HOLTZ-EAKIN. I think there is no way to rule out the fact 

that we would have a recession in the future.—I want to thank the 

chairman for acknowledging the efforts of the staff at the outset. 

I wasn’t at CBO for that projection, but I take issue with the 

phrase ‘‘never honest.’’ This staff does its very best to——

44

Mr. EDWARDS. No. I am talking about from now forward. I am 

not talking about something that was done in the past. What I am 

saying is looking from now forward, would it be honest to suggest 

to the American people that we will not have a recession in the 

next 10 or 20 or 30 years? Would that be consistent? Would it be 

honest to suggest that? 

Mr. HOLTZ-EAKIN. And no one is suggesting that. Instead, what 

we project are near-term business cyclical recoveries——

Mr. EDWARDS. I understand. 

Mr. HOLTZ-EAKIN [continuing]. Please let me finish. And over the 

out-years we project the average performance of the economy in the 

face of unknown timing of business cycle fluctuations, and that is 

the right way to interpret our medium term projections. 

Mr. EDWARDS. Put that into lay terms, and I will finish with this, 

Mr. Chairman. The point is we make budget projections, assuming 

there will be no recessions. You are required to do that, you know. 

I assume that you are required, in effect, to do that. But the truth 

is, just like we said 2 years ago when we debated the 2001 tax cut 

bill, you can’t assume that we are never going to have an economic 

slowdown. So to all of a sudden say oh my gosh, we have an economic slowdown, that is why we have the deficit, we should have 

been honest with the American people in the first place 3 years 

ago. 

Thank you, Mr. Chairman. 

Chairman NUSSLE. Thank the gentleman. I turned off the clock. 

I counted 12 questions. I really am trying to ask if members have 

one final brief question. 

Mr. Moran. 

Mr. MORAN. Thank you, Mr. Chairman. I have a question with 

regard to the process. These are all helpful analyses that you provided us with Dr. Holtz-Eakin, but in many ways as of next week, 

they are going to be outdated, given the fact that we will then embark on a legislative struggle, if you will, process with regard to 

the President’s legislative initiatives. 

And in the President’s budget in the first place, he will give us 

defense spending assumptions for Iraq, Afghanistan, and so on. So 

that will presumably update the numbers you have for the $87 billion supplemental repeated on an annual basis with inflation, but 

he also has projections for the individual savings accounts as an alternative to Social Security. He will have the long-term revised projections that OMB does of the effect of the Medicare and prescription drug changes to legislation. There will be a number of tax proposals. 

There is a tax benefit for health insurance, for example, and all 

of these combined—and I think it is a reasonable assumption that 

most of them are going to get passed, since it is the House and 

Senate are of the same party, and the President has had a remarkable success with the legislation he has proposed. 

All of them combined, I think present a very different budget picture. That plus the fact that you suggested earlier that the numbers start changing as to the role of Social Security and Medicare 

in the out-years. The proportion of spending on Social Security and 

Medicare, because of the dramatic addition of retirees, I guess beginning in 2008, but really accelerating after 2013. Those policies, 

45

plus the changes in Social Security and Medicare dynamics, it 

seems to me, we really ought to be looking at perhaps a 20-year 

projection. I don’t know if that is conceivable, but we really need 

to look at revenue flow and entitlement demands over the long period, particularly with regard to tax policy, because once taxes are 

imposed, it is very—or once they are cut particularly, it is very difficult to reinstate them as we are going to find out. 

So I wonder if CBO is considering giving us updated analyses in 

that context once the President’s budget is introduced? Will you be 

able to give us that kind of updated commentary after next week’s 

budget submission? 

Mr. HOLTZ-EAKIN. Well, certainly we will follow the usual process, in that with the receipt of the President’s budgetary proposals, 

we will do two things: We will revise our baseline projections, the 

ones that you see today in light of information that we receive from 

the administration in terms of credit reestimates and a variety of 

other aspects of it. 

We also have the opportunity to revisit any new information 

about the economy and put that in. So we will comprehensively revise these baseline projections as new information indicates we 

should. We will then analyze the President’s budgetary proposals 

off of that new baseline and give our estimate of their budgetary 

implications. We will also, in the standard fashion, take a look at 

their economic impact as is necessary. And to the extent that the 

Budget Committees are interested in analyses that have a different 

duration than the 10-year window, I would leave it to work with 

Chairman Nussle and members of the committee so that we provide the information you need to do your work. 

In the end, that would be the key issue, and we would be happy 

to work with you on that. 

Mr. MORAN. Well, I would, Chairman Nussle, that you might 

consider even longer-term projections, at least in terms of the tax 

and revenue front given the additional context of Social Security 

and Medicare retirees accelerating after 2013. So it really doesn’t 

present a different budgetary context. So I would hope you might 

consider requesting that of the CBO. Thank you, Mr. Chairman. 

Chairman NUSSLE. Mr. Scott, do you have a question? 

Mr. SCOTT. Yes. Thank you, Mr. Chairman. We have a chart that 

is going up. 

Mr. Holtz-Eakin, are you familiar with this chart? 

Mr. HOLTZ-EAKIN. I have seen it. 

Mr. SCOTT. Well it is a budget deficit—on-budget deficit over the 

last few years. In 1993 when President Clinton came in, he passed 

a budget. That is right when the green starts—with no Republican 

votes. You are aware in 1994 the Republicans campaigned against 

those votes, and in 1995, came in control of the House and the Senate and passed—are you familiar with the massive tax cuts that 

were in the bills that they passed? Anyway, they were vetoed by 

the President. We closed down the government because President 

Clinton would not sign those massive tax cuts, and the green continued. 

In 2001, are you aware that budgets were passed by the Republican Congress similar to the ones that were vetoed in 1995, only 

46

these were signed by President Bush? And you will see the red ink 

flowing after that. Is that an accurate——

Chairman NUSSLE. Does the gentleman have a question for this 

witness? 

Mr. SCOTT. Is that an accurate description of what happened? 

Mr. HOLTZ-EAKIN. I can go back and look at the bills. I am not 

intimately familiar—you were there. 

Chairman NUSSLE. Is this a chart that is written by CBO or is 

this written by whom? 

Mr. SCOTT. It is the CBO numbers. It is written by the Democratic staff, but that little uptick there is really assuming that we 

reject the President’s initiatives, otherwise it will be going down off 

the chart. 

One other question. You had indicated to my colleague from 

Texas about the Social Security. In 2017, we do have a problem. 

My colleague from Virginia also indicated that a 20-year budget 

would be important, because we have a severe crisis with Social Security running instead of huge surpluses. They start to run huge 

deficits. 

Wouldn’t one solution to this problem be just to repeal Social Security? Would that be legally permissible? 

Mr. HOLTZ-EAKIN. The Congress could choose to alter any program, and Social Security is one of them. 

Mr. SCOTT. And if we are not ready to pay for it, that probably 

would be what we would end up having to do, wouldn’t it? Unless 

we get the budget straight now. 

Thank you, Mr. Chairman. 

Chairman NUSSLE. If there is nothing else to come before the 

committee—does the gentlelady have a brief question? 

Ms. DELAURO. Yes, I do. I have a brief question. Thank you. It 

is a question that has to do with your opinion as a professional 

economist, and that is we are talking about—my colleague from 

Connecticut talked about productivity. It is all about economic 

growth. It is about job creation. We talked about productivity. 

There hasn’t been any real job creation, but the fact of growth, and 

in the future that if—if your professional opinion, that if we continue to have tax cuts that are deficit-financed, in your view, will 

that lead to higher growth in the United States? 

Mr. HOLTZ-EAKIN. Other things equal—again, the important stipulation—productivity growth comes either from technological innovation or providing workers with more of those new technologies—

capital deepening. So we save, invest, provide capital to the future. 

To the extent the fiscal policy in a noticeable fashion detracts 

from our ability to save as a Nation and invest, that will affect productivity growth. 

Ms. DELAURO. Thank you. 

Chairman NUSSLE. I thank the witness for your testimony. We 

will certainly be in touch, I am sure, throughout the year on a 

number of different items. We appreciate your work and your 

staff’s work in preparing this report, and we look forward to working with you again this year. 

Mr. HOLTZ-EAKIN. Thank you. 

Chairman NUSSLE. If there is nothing more to come before the 

committee, this committee stands in recess. 

47

[Whereupon, at 4:31 p.m., the committee was adjourned.]

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